BIR Ruling [DA-420-05]

October 10, 2005 BIR RULING [DA-420-05] SEC. 39 (A) (1); RR 7-2003; DA-219-2005 dtd 5/5/05 Union Ajinomoto Realty Corporation Union Ajinomoto Bldg. 331 Sen. Gil J. Puyat Ave. Makati City Attention: Marco M. Perez Accountant Gentlemen : This refers to your letter dated September 5, 2005, requesting confirmatory ruling on your opinion, that: 1. The vacant and/or idle real properties covered by Transfer Certificate of Titles (TCTs) Nos. 55567 and 55568 which were never used by Union Ajinomoto Realty Corp. (UARC) in its trade or business, nor subjected to depreciation, nor included in its stock in trade or inventory, nor held primarily for sale or lease to customers in the ordinary course of its business, and never rented out to any one since its acquisition, is classified as capital asset in the hands of UARC; 2. The sale of the said vacant and/or idle real property covered by TCTs 55567 and 55568 classified as capital asset in the hands of UARC are subject to the 6% capital gains and 1.5% documentary stamp taxes pursuant to Sections 27(D)(5) and 196(b) of the Tax Code of 1997; 3. The sale of the vacant and/or idle real property, not being used in the ordinary course of the trade or business of UARC is not subject to the 10% value-added tax. It is represented that Union Ajinomoto Realty Corporation (UARC for short) is contemplating to sell its two parcels of land both situated in the City of Pasig, consisting of 68,931 square meters and 18,768 square meters, which are embraced under TCT No. 55567 and TCT No. 55568, both of the Registry of Deeds for Pasig City, respectively; that UARC will sell the property covered by TCT No. 55567 to Duraville Realty & Development Corporation while the property covered by TCT No. 55568 will be sold to OCTAGON Construction Corp. & Manila Mahogany Marketing Corp.; that the two (2) parcels of land have never been developed or used by UARC in the ordinary course of its business; that from the time of its acquisition in the name of UARC, these properties have remained vacant and idle and were not held and owned primarily by UARC for sale to customers in the ordinary course of its trade or business; that they were never leased to anybody nor actually used in business and as such they have always been treated by UARC as capital assets; that you anchored your request on BIR Ruling No. 014-2003 dated October 2003, BIR Ruling DA-155-2005 dated April 14, 2005 and BIR Ruling DA-219-2005 dated May 5, 2005. In reply, please be informed that pursuant to Section 27(A) of the Tax Code of 1997, whenever a corporate real estate developer sells real properties forming part of its inventory or those primarily held for sale to customers, it is considered as a sale of ordinary assets subject to the 32% income tax. However, when the real estate involved is idle, raw, undeveloped, has never formed part of the real estate developer's inventory for sale to customers and has not been used in trade or business, such real property is properly classified as capital asset subject to a final tax of 6% on the gain presumed to have been realized from the sale or transfer pursuant to Section 27(D)(5) of the Tax Code of 1997. Thus, if the real property is a land or building which is not actually used in the business of the seller-corporation and is treated as a capital asset, as that term is defined in Section 39(A)(1) of the Tax Code of 1997, then a final tax of six percent (6%) shall be imposed on the gain presumed to have been realized on its sale, exchange or disposition of such land or building 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, of such land and/or building. [Sections 27(D)(5), Tax Code of 1997] This rule applies, whether or not the seller-corporation is engaged in 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. (BIR Ruling No. 27-02 dated July 3, 2002) Based on your representation, the properties of UARC which are idle and vacant and had not been used in the ordinary course of trade nor have they been classified as properties of a kind which would properly be included in the inventory if on hand at the close of the taxable year nor have they ever been held by the taxpayer primarily for sale to customers in the ordinary course of trade or business, the income derived from the sale thereof is not subject to the expanded withholding tax under Sec. 2.57.2(J) of Revenue Regulations No. 2-98, 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 same Code, based on the gross selling price or Fair Market Value (FMV) as determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher. (BIR Ruling Nos. DA-217-99 & DA-010-02 dated April 12, 1979 and January 29, 2002) Corollarily, only such properties held by a real estate developer primarily for sale or lease to customers in the ordinary course of its real estate development business, and therefore, would be properly included in the inventory of such taxpayer if on hand at the close of the taxable year, or used in his trade or business, are appropriately classified as ordinary assets. Otherwise stated, real properties of a real estate developer other than those enumerated under Section 39(A)(1) of the Tax Code of 1997 and Section 2(b) of Revenue Regulations No. 7-2003 are properly deemed as capital assets. CDHSac Considering that the properties involved were recorded in the books of UARC under the account name of investments; that the properties have been idle from their acquisition; that UARC has not introduced any improvements on the said properties; that UARC did not include as part of its inventories the said properties nor did it derive any rental income at all, it is the considered opinion of this Office that the said properties are considered capital assets. As such, the sale of the said properties shall be subject to the capital gains tax under Section 27(D)(5) of the Tax Code of 1997. Accordingly, we hereby confirm your opinion that: 1. The subject realties of UARC, which have remained vacant, idle, unproductive and unimproved since the time of acquisition, do not fall under any of the assets enumerated under Section 39(A)(1) of the Tax Code of 1997 and Section 2(b) of Revenue Regulations No. 7-2003 and are properly classified as capital assets; 2. The sale of the aforesaid properties covered by TCTs Nos. 55567 and 55568, which are classified as capital assets, is subject to capital gains tax at the rate of 6% on the gain presumed to have been realized from the sale or transfer pursuant to Section 27(D)(5) of the Tax Code of 1997 and to the Documentary Stamp Tax at the rate of P15.00 for each P1,000.00 or fractional part thereof in excess of P1,000.00 or 1.5% of the consideration or fair market value of the property whichever is higher pursuant to Section 196 of the same Code.(BIR Ruling Nos. DA-152-2004 dated March 31, 2004, DA-155-2005 dated April 14, 2005 and DA-168-2005 dated April 15, 2005); and 3. The sale of the said vacant and/or idle real properties, not being used in the ordinary course of the trade and business of UARC, is not subject to the 10% value added tax. (BIR Rulings Nos. DA-024-2001 dated February 26, 2001 and DA-397-2000 dated November 20, 2000.) 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.) JOSE MARIO C. BUAG OIC-Commissioner of Internal Revenue