BIR Ruling [DA-333-06]

May 19, 2006 BIR RULING [DA-333-06] Sec. 27; 109 (p); R.R. 7-2003 R.R. 6-2001; Capital Asset Rudnev Manufacturing Corp. G/F Pascor Bldg.,Pascor Drive Brgy. Sto. Nio, Paraaque City Attention: Mr. Alfredo Limsico President Gentlemen : This refers to your letters dated September 19, 2005, April 8, 2006 and May 8, 2006, stating that Rudnev Manufacturing Corp. (RUDNEV) is a domestic corporation engaged in the manufacturing of insulating panels; that it owns three (3) units of office condominium space numbered: UG-04, UG-05 and UG-06, in Cityland 10, Tower 1, Makati; that these three units were used as its business office until it moved out on April 11, 2002; that for more than two (2) years these three units were vacant; that on October 20, 2004, a Deed of Acknowledgement of Deposit was executed by and between RUDNEV and Augustine Qiu Er-Yang whereby RUDNEV acknowledged the receipt of the amount of Four Hundred Thousand Pesos (P400,000.00) from Augustine Qiu Er-Yang as earnest money or an advance payment constituting 10%,more or less, of the amount offered as consideration if and when condominium units No. UG-05 and UG-06 will be sold to him; that the said amount also served as a deposit to answer any damage that will be caused by the renovation that will be introduced to the subject property by Augustine Qiu Er-Yang in his proposed project of a restaurant establishment; that the said deed also provides that in the event that the intended sale of the above properties in favor of Augustine Qiu Er-Yang will not materialize, the amount deposited or offered as an earnest money or advance payment, as well as, the improvements that will be introduced in the subject properties, shall be forfeited in favor of RUDNEV; that RUDNEV shall have no liability, whatsoever, to Augustine Qiu Er-Yang for the said improvements; that in November 2004, Augustine Qiu Er-Yang introduced improvements in condominium units No. UG-05 and UG-06 pursuant to the above agreement executed with RUDNEV; that on July 27, 2005, units No. UG-05 and UG-06 were sold to Augustine Qiu-Er-Yang in the aggregate amount of P3,916,140.00; that only in July 2005 or after condominium units No. UG-05 and UG-06 were sold to Augustine Qiu-Er-Yang that his restaurant known as SERGIO'S DEM Restaurant started its regular and full operation. Based on the foregoing, you are requesting for a ruling classifying your real properties as capital assets for tax purposes in accordance with Revenue Regulations (RR) No. 7-2003. Further, considering that the classification of the subject properties is yet to be determined, you are requesting that the penalties, surcharge and interest imposed for late filing of the return and payment of taxes shall be waived and that the buyer will be relieved of his duty to withhold the taxes on the subject sale transaction. In support of your request, you submitted the following: 1) Inspection Report by Makati City (moved out report dated April 11, 2002); 2) Cityland Association Certification indicating the period of vacancy of more than two (2) years; 3) Two (2) separate Deeds of Sale, both dated July 27, 2005; 4) Deed of Acknowledgement of Deposit executed on October 20, 2004; and 5) Cityland Association Certification clarifying that Augustine Qiu Er-Yang, the owner of SERGIO'S DELI Restaurant, occupied the subject properties from November 2004 up to June 2005, not as a lessee but on the understanding that he will purchase the properties and renovate the same in accordance with the terms and conditions set forth in the deed executed with RUDNEV. 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 building 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. CTaSEI 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 condominium units No. UG-05 and UG-06 subject of the sale should be treated as capital assets in the hands of RUDNEV. Therefore, the sale of said realties is 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 shall be paid through the withholding tax scheme. Accordingly, the buyer of a capital assets must 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 documents. However, considering that in the instant case the classification of the subject properties is determined only at this time, the buyer, Augustine Qiu Er-Yang, is hereby discharged of his duty to withhold the taxes. As a consequence thereof, the penalty, surcharge and interest imposed for late filing of return and late payment of taxes are hereby waived. RUDNEV, as the seller, is hereby required to file the capital gains tax return and pay the capital gains tax due thereon. On the other hand, the sale of the subject properties to Augustine Qiu Er-Yang is subject to the documentary stamp tax (DST) imposed under Section 196 of the 1997 Tax Code, as amended. The DST return and the amount due thereon shall be filed and paid within five (5) days after the close of the month when the taxable document was made or notarized. (Revenue Regulations No. 6-2001) Since there is delay in the filing of the DST return and in the payment of the amount due thereon, and that there is no presence of an extra-ordinary circumstance in the instant case that would justify the said delay, the corresponding penalty, surcharge and interest imposed for late filing of return and payment of tax shall be applied thereto. Finally, considering that RUDNEV is a corporation not primarily engaged in the real estate business and that the above subject real properties are not used in its trade or business, thus, properly classified as capital assets, the sale of said realties, therefore, is not subject to the 10% value-added tax (VAT) imposed under Section 106 of the Tax Code of 1997, as amended, in relation to Section 109 (p) thereof. (VAT Ruling No. 012-2002 dated March 6, 2002). 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. IHaCDE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service