BIR Ruling [DA-189-03]

June 17, 2003 BIR RULING [DA-189-03] 30; 105 BIR Ruling 054-96 BIR Ruling 033-97 VAT Ruling 063-97 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. E.C. Alcantara Tax Division Gentlemen : This refers to your letter dated March 27, 2003, requesting confirmation of your opinion, on behalf of your client, Ateneo de Manila University (Ateneo), that the conveyance of real property, on an isolated basis by an educational institution to its qualified employees is neither subject to income tax nor value added tax. It is represented that Ateneo is a non-stock, non-profit educational institution organized primarily to establish to provide educational services and in so doing, conducts a university and maintains the necessary schools, colleges and institutes; that it owns a parcel of land in Marikina with an approximate area of 3.4 hectares; that around thirty million pesos have already been spent by the University for slope protection and land development; that as a means of promoting the welfare of its employees, and to encourage them to stay with the university, there is a proposal to subdivide and convey the land for housing, to qualified employees, such as permanent faculty members, permanent administrators and professionals and office and maintenance staff who do not have houses or permanent faculty members and permanent administrators and professionals who have houses but would like to reside in the Ateneo subdivision; that the proceeds to be derived from this conveyance shall be used exclusively for educational purposes by Ateneo; that construction of the houses will be the sole responsibility of the qualified employees with Ateneo acting merely as the Project Manager; that Metrobank would extend a loan to the qualified employees equivalent to 80% of the required amount in constructing the said housing units; that in order to facilitate the completion of the housing project, Ateneo shall extend a loan equivalent to ten percent (10%) of the remaining amount required, free of interest; that the remaining ten percent (10%) will be shouldered by the qualified employees; that payment of the 10% loan, may be waived by Ateneo in case the employee remains with Ateneo for a period of ten years; that otherwise, the entire 10% loan, shall be paid by the employee. In reply, please be informed that the conveyance by Ateneo of its 3.4 hectare Marikina property, being an isolated sale of real properties and using the proceeds thereof in furtherance of its educational purposes cannot be considered as an activity conducted solely for profit, because a single transaction of incidental character does not constitute engaging in business. ( BIR Ruling No. 115-92, 388-93, DA-316-07-16-98, DA-172-03-19-99 ) Hence, the said transaction is exempt from income tax. IEDaAc Moreover, Section 105 of the Tax Code provides: "The phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity." As can be gleaned from the above provision, only persons who sell properties in the course of trade or business shall be subject to the 10% VAT. The Tax Code further provides that sale of real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business of the seller is subject to VAT. Ateneo is not engaged in the business of selling real properties in the regular conduct of its affair. Moreover, at no time was the Marikina property held primarily for sale to customers or held for lease in the ordinary course of trade or business. The said conveyance is thus not subject to the value added tax. ( VAT Ruling No. 063-97, BIR Ruling No. 54-96, BIR Ruling No. 033-97 ) In Revenue Regulations No. 3-98, it is provided that if an employer lends money to an employee interest free or at an interest rate lower than 12%, the 12% interest foregone, or the difference between the assigned rate and the 12% shall be subject to fringe benefits tax. Accordingly, since Ateneo is lending money to qualified employees free of interest, then the 12% interest foregone by Ateneo, on money lent to its employees shall be subject to fringe benefits tax for permanent faculty, administrator and professional employees and to withholding tax on compensation for office and maintenance staff. If the qualified employee remains in the service of Ateneo for at least ten (10) years, then the value of the loan shall be treated as compensation income subject to withholding tax. Otherwise, the loan shall be repaid in full by the concerned employee. The condonation of the loan at the expiration of the ten (10) year period shall not be subject to donor's tax considering that there is no donative intent nor act of liberality involved. ( Perez vs. The Commissioner of Internal Revenue, CTA Case No. 1707, February 10, 1969 ) The waiver or condonation of the loan is not premised upon the liberality of Ateneo but rather on the service extended by the qualified employee. 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 null and void. Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service