BIR Ruling [DA-239-02]

December 17, 2002 BIR RULING [DA-239-02] Ayala Land, Inc. Tower One, Ayala Avenue Makati City Attention: Atty. Sheila Marie L. Uriarte-Tan Senior Division Manager-Legal Division Gentlemen : This refers to your letters dated March 16, 2001 and October 9, 2002, stating that Mark Angelo C. Cuaycong and Jose Maximo C. Cuaycong (hereinafter referred to as "Sellers") are Filipino citizens and of legal age and the respective registered owners of two parcels of land covered by Transfer Certificates of Title Nos. 151799 and 151798 of the Registry of Deeds for the Province of Negros Occidental, both situated in the Municipality of Talisay, with an aggregate area of 441,085 square meters and an aggregate net buildable area of 420,338 square meters (hereinafter collectively referred to as the "Properties"). On the other hand, Ayala Land, Inc. (Buyer, for brevity) is a corporation duly organized and existing under Philippine laws and qualified to own land in the Philippines. On January 21, 2000, the Sellers executed in favor of the Buyer a Deed of Absolute Sale whereby the Sellers sold the Properties for an aggregate selling price of P126,101,400.00 corresponding to the rate of P300.00 per square meter of the net buildable area of the Properties. The Buyer withheld from the purchase price payable to the Sellers the aggregate amount of P7,566,084.00 representing the 6% capital gains tax due on the sale by the Sellers of the Properties and remitted the same to the Bureau of Internal Revenue Office No. 12 at Bacolod City, Negros Occidental. Other taxes on the sale of the Properties, including documentary stamp taxes due on the Deed, have likewise been paid for. Thereafter, the Buyer applied for the issuance of a certificate authorizing registration from BIR-Region 12, which application is still pending, subject to the resolution of the appropriate tax rates applicable to the sale transaction. It is further represented that the Sellers are not engaged in the real estate business and the Properties are not included in their stock in trade or inventory, nor held for sale or for lease to customers. Further, the Properties are not subject to any allowance for depreciation and at the time of sale, neither used in trade or business. At the time of execution of the Deed, the parcels of land were not being utilized for any purpose and are free of all improvements. And, finally, the sale being made by the Sellers is isolated in nature. In support of your request you have submitted the following documents: 1. Photo copy of the Deed of Absolute Sale executed by and between Mark Angelo C. Cuaycong and Jose Maximo C. Cuaycong III, as Sellers, and Ayala Land, Inc. represented by its Attorneys-In-Fact, as Buyer; 2. Photo copies of Certificate of Transfer of Title Nos. T-151798 and T-151799; and 3. Certificate of no improvements issued by the City of Assessor of Talisay, Negros Occidental. On the basis of the foregoing, you are requesting for confirmation of your opinion that 1. The Properties sold by the Sellers to the Buyer are capital assets within the meaning of Section 24(D) of the Tax Code. 2. This sale by Sellers to the Buyer of the Properties, being capital assets, is subject to a final tax of six percent (6%) of the gross selling price thereof pursuant to Section 39(A)(1) of the Tax Code; and that the amount so withheld by the Buyer as capital gains tax payable by the Seller and remitted to the Bureau of Internal Revenue is adequate payment of the capital gains tax due. 3. In the event that the Properties are considered ordinary assets, the liability to pay the deficiency income tax otherwise payable, should be levied upon the Sellers, being the taxpayers for the transaction, and not upon the Buyer. In reply, please be informed that Section 39(A)(1) of the Tax Code of 1997 defines the term "capital assets" to mean property held by the taxpayer (whether or not connected with his trade or business), but does not include: a) 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 or the taxable year; or b) Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade and business; or c) 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 d) Real property used in trade or business of the taxpayer. It appears that the Properties, prior to and at the time of the execution of the Deed, were (and continue to be) exempt from the coverage of the Comprehensive Agrarian Reform Program, having been classified from agricultural to non-agricultural prior to the effectivity of Republic Act No. 6657; and further that the Properties were not planted to sugarcane or other crops for business and trade purposes nor subject to any improvement at the time of the execution of the Deed. Clearly, the Properties in question are "capital assets" since the same do not fall under any of the above criteria or classification. Accordingly, we hereby confirm your opinion that the sale of said properties is subject to the capital gains tax of 6% imposed under Section 27(D)(5) of the 1997 Tax Code. Thus, the amount withheld by the Buyer as capital gains tax payable by the Sellers and which, as represented, was already remitted to the Bureau of Internal Revenue, is an adequate payment of the capital gains tax due on the transaction. Answer to question No. 3 is no longer necessary in view of the foregoing answers to questions 1 and 2. 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