SGV & Co.

April 12, 2007 BIR RULING [DA-221-07] Section 106; DA-342-2005 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. R. C. Vinzon Tax Services Gentlemen : This refers to your letter dated June 22, 2006 requesting on behalf of your client, Hospital Management Services, Inc., ("HMSI"), for a confirmation of your opinion regarding the tax implications of the proposed sale of HMSI's building to Yaman Lahi Foundation, Inc.-Emilio Aguinaldo College ("YLFI-EAC"). It is represented that HMSI is a corporation organized and existing under and by virtue of the laws of the Philippines; its principal office address is at 1122 General Luna St., Ermita, Manila; that it is engaged in the establishment, operation, management, administration, owning and maintenance of hospitals, medical and chemical laboratories; that YLFI-EAC is a non-stock, non-profit educational institution which operates the Emilio Aguinaldo College ("College") through its Board of Trustees; that its principal office address is at 1113-1117 San Marcelino St., Paco, Manila; and that it is engaged in the operation of a private science and research foundation, provision of financial support for the education of selected students and for attendance at scientific conferences, and in the organization, conduct and carrying on of the operation of health sciences educational institutions, such as the said College. aETDIc It is further represented that approximately ninety-eight percent (98%) of the shares of stock of HMSI is owned by YLFI-EAC; that HMSI owns a building, the Emilio Aguinaldo College Building 7 (EAC7), and the improvements thereon, which is situated at No. 113-117 San Marcelino Street corner Calle Gonzales, Ermita, Manila; that the building is not used in the trade or business of HMSI; and that YLFI-EAC and HMSI propose to execute a Deed of Assignment whereby HMSI shall sell, transfer and convey to YLFI and its assigns EAC7 and its improvements. Based on the foregoing representation, you now request for confirmation that the proposed sale of EAC7 by HMSI to YLFI is not subject to VAT considering that the said building is not held by HMSI primarily for sale to its customers or held for lease in the ordinary course of its trade or business, and that said building is not used in the trade or business of HMSI. In reply thereto, please be informed that Section 109 (P) of the Tax Code of 1997, as amended, and Section 4.109-1 (B) (p) (1) of Revenue Regulations No. 16-2005, as amended by Revenue Regulations No. 4-2007, provide as follows: "SEC. 109. Exempt Transactions. (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax: xxx xxx xxx (P) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, residential lot valued at One million five hundred thousand pesos (P1,500,000) and below, house and lot, and other residential dwellings valued at Two million five hundred thousand pesos (P2,500,000) and below: Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amounts herein stated shall be adjusted to their present values using the Consumer Price Index, as published by the National Statistics Office (NSO); xxx xxx xxx." Sec. 4.109-1. VAT-Exempt Transactions . (B) Exempt Transactions . (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from VAT: xxx xxx xxx. (p) The following sales of real properties are exempt from VAT, namely: (1) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business. However, even if the real property is not primarily held for sale to customers or held for lease in the ordinary course of trade or business but the same is used in the trade or business of the seller, the sale thereof shall be subject to VAT being a transaction incidental to the taxpayer's main business." The term "primary" is defined as "first, principal, chief, leading, or first in order of time, or development, or intention" (Black's Law Dictionary, Sixth Edition). Thus, to be "held primarily for sale or lease," the property must be held with the chief intention of being sold or leased. In BIR Ruling No. DA-032-2005, dated January 27, 2005, it was held that the assignment of PHPI of its buildings and all improvements, edifices, and structures erected on parcels of land comprising the Cebu Plaza Hotel in favor of Asia Recovery Corporation ("ARC") by way of dacion en pago is exempt from the 10% (now 12%) VAT inasmuch as the said properties are not among the stock in trade of PHPI and due to the fact that PHPI is not primarily engaged in the buying and selling of real properties, nor in leasing of properties. CaEATI More recently, in BIR Ruling No. DA-305-06, dated May 10, 2006, it was reiterated that the absolute sale of properties by Filipinas Shutters, Inc. is not subject to VAT inasmuch as the real properties are not among the stock in trade of Filipinas Shutters, Inc., and due to the fact that it is not primarily engaged in the buying and selling of real properties, nor in the leasing of properties. Hence, since the building to be sold by HMSI is not used in the trade or business, and is also not among its stock in trade, and due to the fact that it is not primarily engaged in the buying and selling of real properties, nor in the leasing of real properties, but rather it is primarily engaged in the establishment, operation and management of hospitals, and medical laboratories, it follows that the sale of the building is exempt from VAT pursuant to the aforequoted Section 4.109-1 of Revenue Regulations No. 16-2005, as amended by Revenue Regulations No. 4-2007, implementing now Section 109 (P) of the Tax Code of 1997. IcSEAH 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service