Chato & Vinzons-Chato

April 17, 2008 BIR RULING [DA-248-08] DA-060-03 Chato & Vinzons-Chato 8th Floor, STRATA 2000 F. Ortigas Jr. Road Ortigas Center, Pasig City Attention: Atty. Wilfredo M. Chato and Atty. Esther R. Ibaez Gentlemen : This refers to your letter dated June 19, 2007 stating that your clients, Casas Development Corporation (Casas) and Basilisa Farms, Inc. (Basilisa), are both corporations duly organized and existing under the laws of the Philippines with principal office address at the RST Compound, Km. 16 Alabang-Zapote Road, Pamplona, Las Pias City; that Casas is primarily organized to acquire by purchase or lease, or otherwise lands and interest in land, and to own, hold, improve, develop, sell and manage any real estate so acquired and to erect or cause to be erected on any land owned, held or occupied by the corporation, buildings or other structures with their appurtenances, and to rebuild, enlarge, alter or improve any buildings or other structures now or hereafter erected on any land so owned, held or occupied and to mortgage, sell, lease or otherwise dispose of any land or interest in land and in buildings or other structures, and any stores, shops, suites rooms or part of any buildings or other structures at any time owned or held by the corporation; that on the other hand, Basilisa is primarily organized to engage either by itself or in joint venture with local or foreign in the business of buying, reselling and exporting Philippine handicrafts and Philippine agricultural, marine and forest products; that Casas is the absolute owner of seventeen (17) parcels of land located in Oriental Mindoro and more particularly described as follows: TCT No. Area (sq. m.) 34300 81,447 34301 92,088 34302 50,380 34303 75,255 34304 82,224 34305 84,700 34306 85,316 34307 87,866 34310 74,485 34311 81,294 34312 82,108 34313 81,611 34314 88,945 34315 91,356 34325 70,961 34326 58,865 34336 77,496 that on the other hand, Basilisa is the owner of thirty-nine (39) parcels of land located in Oriental Mindoro and more particularly described as follows: TCT No. Area (sq. m.) J-1470(T-63939) 78,440 J-1471(T-63940) 67,683 J-1480(T-63941) 44,868 J-1486(T-63946) 194,519 J-1491(T-63947) 214,154 J-1492(T-63968) 82,525 J-1488(T-64102) 36,398 J-1489(T-64103) 34,423 J-1490(T-64104) 103,266 J-1477(T-64105) 53,233 J-1495(T-64106) 15,000 J-1487(T-64146) 46,556 J-1499(T-64147) 46,410 J-1497(T-64148) 20,000 J-1472(T-64149) 79,753 J-1496(T-64150) 20,000 J-1494(T-64151) 20,000 J-1500(T-66404) 84,735 J-1473(T-66405) 112,619 J-1474(T-66406) 74,506 J-1476(T-68528) 75,723 J-1456(T-68530) 80,872 J-1475(T-68533) 29,838 J-1457(T-69343) 117,163 J-1461(T-62344) 38,045 J-1461(T-69348) 38,044 J-1462(T-69358) 101,164 J-1479(T-69359) 69,719 J-1450(T-69360) 90,987 J-1451(T-69361) 15,001 J-1452(T-69363) 73,734 J-1453(T-69364) 70,862 J-1454(T-69365) 81,984 J-1455(T-69367) 78,621 J-1459(T-69368) 44,030 J-1464(T-69369) 74,604 J-1458(T-69373) 59,833 J-1466(T-69374) 76,642 that the above-mentioned properties were expropriated by the Municipality of Bansud; that the just compensation for the subject properties is P4.36 per square meter or with an aggregate amount of P17,500,000.00, of which P4,314,050.00. were already paid and the remaining balance shall be spread over for a period of ten (10) years starting 2002; that before the expropriation, these properties were undeveloped parcels of land and not leased to third parties; that however, despite them being capital assets, the expropriation of said properties was subjected to a 5% creditable withholding tax; that the corporate officers executed a withholding tax return (BIR Form No. 1606) without knowing its full tax implication; and that the BIR No. 063, City of Calapan, Revenue Region No. 9 then issued a Certificate Authorizing Registration certifying that the supposed taxes were already paid. Based on the foregoing representations, you now request that the subject properties, which are actually undeveloped and not leased to third parties nor held for sale or used in trade or business of Casas and Basilisa and are not subject to depreciation, should be classified as capital assets pursuant to Section 39 (A) (1) of the Tax Code of 1997, and shall be subject to the 6% final capital gains tax imposed under Section 27 (D) (5) of the Tax Code of 1997, and not to the 5% creditable withholding tax imposed in case of transfer of ordinary assets, and that both Casas and Basilisa are willing to pay an additional 1% of the selling price or an amount equivalent to P175,000.00 to rectify the unfortunate error in the classification of the subject properties. In reply thereto, please be informed that Section 27 (D) (5) of the Tax Code of 1997 provides that a final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price or fair market value as determined in accordance with Section 6 (E) of the said Code, whichever is higher, of such lands and/or buildings. This rule applies, whether or not the seller-corporation is engaged in the real estate business. On the other hand, it is only when the real property being sold is an ordinary asset that the withholding tax rates imposed under Section 2.57.2 of Revenue Regulations No. 2-98, as amended, shall apply. The rate of withholding tax will depend on whether, first, the seller is exempt or taxable; second, whether the seller is habitually engaged in real estate business or not; and third, if the seller is habitually engaged in real estate business, the gross selling price, as that term is defined in the above-mentioned Revenue Regulations. (BIR Ruling No. DA-152-04 dated March 31, 2004; BIR Ruling No. 27-02 dated July 3, 2002) Based on your representation, since the above-mentioned properties were actually undeveloped and not leased to third parties nor held for sale or used in trade or business and are not subject to depreciation, the income to be derived from the expropriation of the above-mentioned properties, are not subject to the expanded withholding tax under Section 2.57.2 (J) of Revenue Regulations No. 2-98, as amended, but only to the 6% capital gains tax imposed under Section 27 (D) (5) of the Tax Code of 1997 and to the documentary stamp tax under Section 196 of the said Code, based on the gross selling price or fair market value as determined in accordance with Section 6 (E) of the Tax Code of 1997, whichever is higher. Considering that the above-mentioned properties of Casas and Basilisa do not fall under any of the assets enumerated under Sections 39 (A) (1) of the Tax Code of 1997 and Section 2 (b) of Revenue Regulations No. 7-2003, the same should be properly classified as capital assets for tax purposes. (BIR Ruling No. DA 060-03 dated March 3, 2003) Accordingly, we hereby confirm your opinion that the expropriation of the aforesaid real properties by the Municipality of Bansud, do not fall under any of the assets enumerated under Sections 39 (A) (1) of the Tax Code of 1997 and 2 (b) of Revenue Regulations No. 7-2003, be considered as capital assets and are subject: 1. To capital gains tax of 6% pursuant to Section 27 (D) (5) of the Tax Code of 1997; 2. To documentary stamp tax at the rate of P15.00 for each P1,000 or fractional part thereof in excess of P1,000, or 1.5% of the consideration or fair market value of the properties, whichever is higher, pursuant to Section 196 of the said Code; and 3. However, the proposed sale is not subject to the 12% VAT pursuant to Section 4.109-1 (p) of Revenue Regulations No. 16-2005 inasmuch as said properties are not held primarily for sale or lease to Casas and Basilisa's customers nor use in the ordinary course of its primary trade or business. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service