BIR Ruling [DA-168-05]

April 15, 2005 BIR RULING [DA-168-05] DA-008-04 dtd 1/6/04 WAJAH EMAS International Ltd., Inc. EGL Bldg. cor. Pascor Drive & Johann St. Sto. Nio, Paraaque City Attention: Mr. Anthony Tee Gentlemen : This refers to your letter dated January 21, 2005, requesting a ruling on the issue of the Value-Added Tax on the sale of a parcel of land. It is represented that WAJAH EMAS INTERNATIONAL LTD. INC. (WAJAH EMAS, for brevity) is a domestic corporation registered with the Securities and Exchange Commission (SEC) primarily to engage in general construction and other allied businesses including the constructing, enlarging, repairing, removing, developing or otherwise engaging in any work upon buildings, roads, highways, manufacturing plants, bridges, airfields, piers, docks, mines, shafts, waterworks, railroads, railway structures, all iron, steel, wood, masonry and earth construction except government projects; that it appears that you purchased two (2) parcels of land situated at Naic, Cavite, which you intended as the site of a proposed storage house/warehouse; that the properties were not intended for speculative purposes; however due to the economic situation, your company incurred successive losses which forced you to stop operations since May 1, 2002; that from inception, after you bought the properties, they had remained idle since then; that you have not introduced any structures or buildings, not even a perimeter fence; that with the further downtrend of the economy in the Philippines, you opted to close down the business since you have not operated for more than two (2) years as evidenced by your BIR returns, Forms 1601-C; 1601-E and 2550 M duly filed, stamped and received by the BIR, disclosing net loss and no operations since May 1, 2002 to the present; that you do not have the intention to revive the business in the future anymore; that as a consequence thereof, you opted to sell the properties; that the properties were sold for half the acquisition costs and below the zonal valuation of the place; that you have already paid the corresponding Capital Gains Tax (CGT) and the Documentary Stamp Tax (DST) on the sale of such properties in August 2004, and up to now, you are still waiting for the release of the Certificate Authorizing Registration (CAR) from Revenue District Office #54 (Trece Martirez, Cavite); that it is your opinion that the sale of the land is not subject to the Value-Added Tax (VAT) since it is provided under Revenue Regulations 7-2003, Sec. 3 (e) thereof that properties classified as ordinary assets for being used in business by a taxpayer engaged in business other than real estate business as defined in Section 2 (g) of this Regulation are automatically converted into capital assets upon showing proof that the same have not been used in business for more than two (2) years prior to the consummation of the taxable transactions involving said properties; that you are engaged in a business other than real estate business. In reply, please be informed that Section 27(D)(5) of the Tax Code of 1997 provides that a final tax of six percent (6%) is hereby imposed on the gains presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price or fair market value as determined in accordance with Section 6 (E) of the said Code, whichever is higher, of such lands and/or buildings. On the other hand, Section 3(e) of Revenue Regulations No. 07-2003, provides the guidelines in determining whether a particular real property is a capital asset or ordinary asset. The regulations state that real properties formerly forming part of the stock in trade of a taxpayer engaged in the real estate business, or formerly being used in the trade or business of a taxpayer engaged or not engaged in the real estate business, which were later on abandoned or became idle, shall continue to be treated as ordinary assets. Real property initially acquired by a taxpayer engaged in the real estate business shall not result in its conversion into a capital asset even if the same is subsequently abandoned or becomes idle. However, properties classified as ordinary assets for being used in business by a taxpayer engaged in business other than real estate business as defined in Section 2(g) hereof are automatically converted into capital assets upon showing proof that the same have not been used in business for more than two (2) years prior to the consummation of the taxable transaction involving said properties . (emphasis supplied) In view of the foregoing provision, the sale of the two (2) parcels of land by WAJAH EMAS is a sale of capital asset subject to 6% Capital Gains Tax under Section 27(D)(5) in relation to Section 39(A)(1) of the Tax Code of 1997 (BIR Ruling No. DA040-03 dated February 10, 2003; DA-009-03 dated January 14, 2003; 166-81 dated September 3, 1981; DA-217-99 dated April 12, 1999; DA-397-2000 dated November 20, 2000; DA-010-02 dated January 29, 2002; DA-009-2002 dated January 28, 2002), due to the following: 1. WAJAH EMAS had stopped operations since May 1, 2002, and has no intention of reviving its business operations. The subject properties had not been used since inception. 2. The parcels of land are not held by WAJAH EMAS for speculative purpose. In fact it has sold the properties for half of their acquisition costs and even below the zonal valuation of the place. As such, WAJAH EMAS' two (2) parcels of land are properly classified as capital assets and the sale is subject to capital gains tax at the rate of 6% based on the gross selling price or current fair market value at the time of the sale, whichever is higher, pursuant to Sections 27(D)(5) and 39(A)(1) of the Tax Code of 1997. Moreover, the Deed of Sale embodying the transaction whereby WAJAH EMAS sells, transfers and conveys to the buyer the subject parcel of land, is subject to documentary stamp tax of 1.5% based on the consideration or value received or paid for the property, or on its fair market value whichever is higher, pursuant to Section 196 of the Tax Code of 1997 (BIR Rulings Nos. 459-88 dated September 19, 1998 and DA-049-2000 dated January 21, 2000) SECAHa However, the sale of the subject land is not subject to the 10% Value-Added Tax (VAT) inasmuch as the subject parcels of land are not held primarily for sale or lease to its customers nor for use in the ordinary course of its primary trade or business of construction, the fact being that WAJAH EMAS ceased the said business more than 2 years ago and has no intention of reviving the same. The subject properties are automatically converted into capital assets by virtue of Revenue Regulations 7-2003. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group