BIR Ruling [DA-237-05]

May 31, 2005 BIR RULING [DA-237-05] Sec. 27; RR 7-2003 Capital asset Mrs. Virginia T. Habaluyas 107 Bougainvilla Street Ayala Alabang, Muntinlupa City M a d a m : This refers to your letter dated April 25, 2005 requesting for a ruling on the applicability of the provisions of Section 27(D)(5) of the 1997 Tax Code, as amended, on the proposed sale by HANA MANAGEMENT & DEVELOPMENT CORPORATION (HANA for brevity) of its real property and improvement located at Dasmarias Village, Makati City. It is represented that HANA is a domestic corporation established under the laws of the Philippines on July 27, 1983, with principal address at 107 Bougainvilla Street, Ayala Alabang Village, Muntinlupa City; that the primary purpose of HANA, as enunciated in its Articles of Incorporation is as follows: "To act as commercial agent, factor of, or to undertake the general management for any person, partnership, corporation, or association in carrying on business of any nature, either within or without the Philippines, and while acting as such agent, factor, or manager, to perform such acts, enter into such obligations, and carry out such transactions as shall tend to promote the interest that the corporation shall represent; to represent investors and bring them into contract with investments, and to act as fiscal or real estate agent for individuals, firms, or corporations, except management of funds, securities, and similar assets of other firms;" that the said primary purpose of HANA remains unchanged since its incorporation up to the present; that HANA acquired a parcel of residential land and improvement in Lumbang Street, Dasmarias Village, Makati City on October 17, 1983, as part of the investments of the corporation for the purpose of speculation as to the latter appreciation of real estate values; that sometime in January 2005, it has been decided by management to offer the Dasmarias Property for sale to the general market due to the lack of interest of the Corporation in maintaining the said property; that based on the foregoing, you are requesting for a ruling whether or not the sale of the Dasmarias Property of HANA should be classified as a capital asset and will be subjected to a 6% capital gains tax and 1.5% documentary stamp tax in lieu of the 6% creditable withholding tax, 1.5% documentary stamp tax and 10% value-added tax (VAT) considering that HANA is a corporation not primarily engaged in the real estate business and that the above property has been held by HANA as an investment and no revenue has been derived therefrom in the last four (4) years prior to the proposed disposition or transaction. In reply, please be informed that pursuant to Section 27(D)(5) of the Tax Code of 1997, as amended, a final tax of 6% is imposed on the gain presumed to have been realized on the sale, exchange or disposition of land and/or buildings which are actually not used in the business of a corporation and are treated as capital assets, based on the gross selling price, or fair market value, whichever is higher. DaIACS On the other hand, pursuant to the second paragraph of Section 3(e) of RR No. 7-2003, 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 of 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 the said properties. From the foregoing and based on the above representations, this Office hereby rules that the above subject property is properly treated as a capital asset in the hands of HANA, thereby, the sale of said property shall be subject to the 6% capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997, as amended. Moreover, under Section 2 of Revenue Regulations No. 17-2003, further amending Sec. 2.57.1 of RR No. 2-98, as amended, the above 6% capital gains tax may be paid through the withholding tax scheme. Accordingly, the buyer of a capital asset shall withhold the 6% final tax and remit the same to the revenue district office (RDO) having jurisdiction over the place where the property is located within thirty (30) days from the time of notarization of the transfer document. Finally, considering that HANA is a corporation not primarily engaged in the real estate business and that the above subject property is not even used in its trade or business, thus, properly classified as its capital asset, its sale, therefore, is not subject to the 10% VAT imposed under Section 106 of the Tax Code of 1997, as amended. 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group