BIR Ruling [DA-317-06]

May 11, 2006 BIR RULING [DA-317-06] BIR Ruling No. DA189-03 Central Philippine University Iloilo City Attention: Ms. Perla G. Deocampo Officer-In-Charge Gentlemen : This refers to your letter dated February 28, 2006 requesting, in effect, for exemption from payment of the capital gains tax (income tax) on the sale by the Central Philippine University ("CPU") of its real property situated in Pavia, Iloilo. As represented, the CPU is a non-stock, non-profit educational institution duly organized and existing under the laws of the Philippines. It is a domestic corporation with principal office at Lopez Jaena Street, Jaro, Iloilo City. It does not distribute or divide any dividend or profit among the members of the Board of Trustees. No income or revenue whatsoever inures to the benefit of any member of the Corporation or Board of trustees, unless he/she is employed therewith. In 2001, the CPU Board of Trustees has approved a resolution on the development of the CPU real property in Pavia, Iloilo, for the faculty and staff housing. The project is known as the Central Philippine University Centennial Village (CPU Centennial Village) in connection with the Centennial Celebration of CPU in 2005. To realize this purpose, CPU obtained a PhP10 million loan from the Development Bank of the Philippines to finance the development of CPU Centennial Village. In 2003, CPU subdivided the said real property which has a gross area of 29,140 square meters (sq. m.) - 3,122 sq. m. as reserved areas and 26,018 sq. m. as saleable area. DcaCSE The aforementioned village is registered with the Housing and Land Use Regulatory Board (HLURB) as a "low cost housing" subdivision. As a policy, the sale of any residential unit is exclusive to CPU regular employees faculty and staff; it is not for speculation or investment; it is not transferable to non-CPU employees; and CPU has formulated specific policies on the disposition and/or acquisition thereof. The units are sold through PAG-IBIG. Whatever revenue generated from the sale of any unit, such revenue becomes the general fund of the University, and the same is being used for its operation as an education institution. The income from the sale of any unit in the CPU Centennial Village is actually, directly and exclusively used for educational purposes. In reply, please be informed that in BIR Ruling No. DA-189-2003, a proposal was raised to subdivide and convey a real property owned by a non-stock, nonprofit educational institution for housing to qualified employees (i.e., faculty members, administrators, office staff) as a means of promoting their welfare and to encourage them to stay with the university. This Office ruled that ". . . the conveyance by Ateneo of its 3.5 hectare Marikina property, being an isolated sale of real properties and using the proceeds thereof in furtherance of its educational purposes cannot be considered as an activity conducted solely for profit, because a single transaction of incidental character does not constitute engaging in business. Hence, the said transaction is exempt from income tax. Moreover, Section 105 of the Tax Code provides: 'The phrase "in the course of trade of business" means the regular conduct or pursuit of a commercial or an economic activity, including transaction incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to member or their guests), or government entity.' As can be gleaned from the above provision, only persons who sell properties in the course of trade or business shall be subject to the 10% VAT. The Tax Code further provides that sale of real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business of the seller is subject to VAT. Ateneo is not engaged in the business of selling properties in the regular conduct of its affair. Moreover, at no time was the Marikina property held primarily for sale to customers or held for lease in the ordinary course of trade or business, the said conveyance is thus not subject to the value-added tax. xxx xxx xxx" In view of the foregoing, this Office hereby rules that the excess of the selling price over the acquisition cost of the property (i.e. the profit/income) to be sold by the CPU, the proceeds of which are being used actually, directly and exclusively for educational purposes shall not be subject to income tax/capital gains tax. 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