Punongbayan & Araullo

April 27, 2007 BIR RULING [DA-276-07] DA 032-05 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue Makati City Attention: Ms. Maria Victoria C. Espao Tax Partner Gentlemen : This refers to your letter dated September 29, 2006 stating that your client, United Pulp and Paper Company, Inc. (UPPC) is a domestic corporation organized and existing under the laws of the Philippines; that it is registered with the Securities and Exchange Commission (SEC) to engage in paper and packaging business; that it is likewise registered with the Bureau of Internal Revenue (BIR) for various taxes, including value-added tax (VAT), among others; that UPPC, in the course of its business has acquired/constructed several properties and equipment; that one of these properties is a cogeneration plant (Plant), which UPPC has been using to generate some of the power and steam requirements of its operations; and that UPPC is now into discussions with an interested buyer for the sale of the Plant, consisting of boiler, turbine, cooling tower and other equipment installed in the Plant. In connection therewith, you now request confirmation of your opinion that the sale of UPPC's Plant, a real property not primarily held for sale or lease, is exempt from VAT. In reply thereto, please be informed that Section 109 (P) of Republic Act (R.A.) No. 9337, as implemented by Revenue Regulations No. 16-2005, provides that "(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 (P1,500,000.00) and below, house and lot, and other residential dwellings valued at Two million five hundred thousand pesos (P2,500,000.00) 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 value using the Consumer Price Index, as published by the National Statistics Office (NS)", shall be exempt from value-added tax. In stressing the rationale of the above-mentioned rule, this Office elucidated the matter in BIR Ruling No. DA396-05 dated September 22, 2005 as follows: "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 VAT Ruling No. 049-98, it was held that the sale by Eastern Canumay Industrial Development Corporation of its property to Ultimate Innovations, Inc. is not subject to VAT. In this ruling, Eastern Canumay Industrial Development Corporation, which is engaged in the production of marble and other marble products, owned several properties, one of which was sold to Ultimate Innovations, Inc. since the property sold is not primarily held for sale in the ordinary course of trade or business, then its sale is not subject to VAT. Also, in VAT Ruling No. 034-01 dated June 13, 2001, it was reiterated that the sale of real property may only be imposed the 10% VAT provided the same is primarily held for sale to customers or held for lease in the ordinary course of trade or business. Since the gas pipeline being sold is not held by FGP Corporation primarily for sale to customers or held for lease in the ordinary course, of its trade or business, considering that its business involves the operation of the aforesaid power generating plant, it follows that FGP Corporation is not subject to VAT with respect to the sale of the gas pipeline, pursuant to the aforesaid provision of the Code and its implementing rules and regulations. "More recently, in BIR Ruling No. DA032-05 dated January 27, 2005, it was reiterated that the assignment by 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% 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 the leasing of properties. "In view of the foregoing, since 688's properties (which include the buildings, machineries and equipment) are not primarily held for sale to customers or held for lease in the ordinary course of trade or business, the sale of the aforesaid properties by 688 is not subject to the 10% VAT pursuant to the aforesaid provision of the Tax Code of 1997 and its implementing rules and regulations. (VAT Ruling No. 034-01 dated June 13, 2001 and BIR Ruling No. DA699-04 dated December 28, 2004)" Considering that the above-mentioned rulings are in all fours similar to the instant case as UPPC is not engaged in the business of selling or leasing real property, and the cogeneration plant that it will be selling is used in its paper manufacturing business, it is axiomatic that the sale thereof is not subject to VAT. CAIaDT WHEREFORE, in view of the foregoing , this Office holds that the sale of the Plant by UPPC which is not held primarily for sale or lease to its customers is not subject to VAT. 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