BIR Ruling [DA-201-06]

April 3, 2006 BIR RULING [DA-201-06] 27 (D) (5); 39 (A) (1), R.R. 7-2003, DA-301-2004 Laya Mananghaya & Co . 22/F, Philamlife Tower, 8767 Paseo de Roxas Makati City Attention: Attys. Francisco G. Tagao Head, Tax & Corporate Services and Ma. Carmela M. Peralta Senior Manager, Tax & Corporate Services Gentlemen : This refers to your letter dated March 30, 2006 requesting on behalf of your client, RS Agri-Development Corporation ("RS") ,for a ruling that the sale of its two parcels of land is subject to the 6% capital gains tax ("CGT") and therefore exempt from the 12% value-added tax ("VAT"). The facts, as represented, are as follows: RS is a domestic corporation with principal office in Barangay Malino, San Fernando, Pampanga. Under its Articles of Incorporation, its primary purpose is "[T]o engage, undertake in, deal in, or otherwise carry on the business, in all branches of agriculture, more particularly in farming, piggery, poultry, cattle and other livestock raising, ..." It has a piggery farm located in Barangay Malino, San Fernando, Pampanga. RS is the registered owner of two (2) parcels of land situated in a different location, specifically, in Barangay Pulong Maragul, Pampanga. These two parcels of land are covered by Transfer Certificates of Title ("TCTs") Nos. 122744 and 122745, issued by the Registry of Deeds for Angeles City, with a total area of 18.306 hectares. The said parcels of land have never been used by RS in its piggery business and have remained vacant and idle. Neither have they been developed nor been offered for rent or actually leased to anybody. Moreover, these two parcels of land were previously part of a 30.29-hectare land covered by TCTs Nos. 83844 and 80483, issued by the Registry of Deeds for Angeles City, and the land use of which was converted from agricultural to commercial per the Order dated 26 May 2003 of the Department of Agrarian Reform ("DAR").Notwithstanding the conversion, RS has not made any development work on the two parcels of land. cACEHI RS now intends to sell the two parcels of land with a total area of 18.306 hectares to a domestic corporation engaged in real estate development. In reply, please be informed that the term "capital asset" as negatively defined in Section 39(A)(1) of the 1997 Tax Code, as amended, means property held by the taxpayer (whether or not connected with his trade or business),but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34, or real property used in trade or business of the taxpayer. Furthermore, Section 3(4) of Revenue Regulations ("RR") No. 7-2003 provides that all real properties acquired in the course of trade or business by a taxpayer habitually engaged in the sale of real estate shall be considered as ordinary assets. As defined under Section 2(g) of RR 7-2003, taxpayers engaged in the real estate business shall refer collectively to real estate dealers, real estate developers, and/or real estate lessors. A taxpayer whose primary purpose of engaging in business or whose Articles of Incorporation states that its primary purpose is to engage in the real estate business shall be deemed to be engaged in the real estate business for purposes of the regulations. Considering that RS is not real estate dealer, real estate developer, and/or real estate lessor and its primary purpose is to carry on its agricultural business, the parcels of land to be sold by RS are not stock in trade or other real property of a kind which would properly be included in RS' inventory if on hand at the close of the taxable year. Nor are they real property held primarily for sale or lease to customers in the ordinary course of trade or business. ( BIR Ruling Nos. DA-163-05 dated April 14, 2005 and 014-03 dated October 28, 2003 ). Furthermore, in BIR Ruling No. 014-03, dated October 28, 2003, it was ruled that for a property to be considered an ordinary asset, it must be actually used in the business of the corporation. The BIR stated that on the condition that the taxpayer concerned was not habitually engaged in the real estate business, the property not actually used in the business of the taxpayer, the same having remained idle and undeveloped, was considered a capital asset. In view of the foregoing, it is the considered opinion of this Office that the income derived by RS from the sale of the above-mentioned parcels of land thereof is not subject to the creditable/expanded withholding tax under Section 2.57.2(J) of RR 2-98, as amended by RR 06-2001, but to the CGT of six percent (6%) based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997, as amended by Republic Act ("RA") No. 9337, whichever is higher, of such parcels of land pursuant to Section 27(D)(5) of the same Code. Moreover, under Section 109(p) of the Tax Code, as amended by RA 9337, the sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business shall be exempt from VAT. Considering, that RS is primarily engaged in agriculture, more particularly in farming, piggery, poultry, cattle and other livestock raising, the above-mentioned parcels of land are not being held by RS primarily for sale to customers or held for lease in the ordinary course of trade or business. Consequently, the sale by RS of the parcels of land shall be exempt from VAT. ( BIR Ruling Nos. DA-130-A-2003 dated April 25, 2003 and VAT Ruling No. 034-2001 dated June 13, 2001 ). Finally, the deed of sale conveying the above-mentioned parcels of land shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6(E) of the same Code, whichever is higher. This ruling shall serve as the authority for the Revenue District Officer concerned to issue the corresponding Certificate Authorizing Registration and tax clearance certificate for the transfer of the titles covering the parcels of land in the name of the buyer. cEAaIS 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, Commissioner of Internal Revenue By: (SGD.) PABLO M. BASTES, JR. OIC, Head Revenue Executive Assistant Legal Service