BIR Ruling [DA-430-04]

August 10, 2004 BIR RULING [DA-430-04] Rev. Regs. No. 7-2003 BIR Ruling No. 114-97; 133-98; 3-2000 & DA-270-04 Digitel Mobile Phils . , Inc . (DIGITEL) 29/F, Galleria Corporate Center EDSA corner Ortigas Avenue Quezon City Attention: Mr . Lance Y. Gokongwei President Gentlemen : This refers to your letter dated April 21, 2004 requesting for a confirmatory ruling on your opinion as follows: 1) The land and the building subject of this query qualify as "capital assets" as that term is defined in Section 39 of the National Internal Revenue Code because the said property is neither: (a) A stock in trade or other property of a kind which would properly be included in the inventory if on hand at the close of the taxable year, nor (b) A property held primarily for sale to customers in the ordinary course of its trade or business, nor (3) A property used in the trade or business, of a character which is subject to allowance for depreciation, nor (4) A real property used in trade or business; 2) The nature of the subject property as a capital asset will not be changed even if the owners thereof allow Digitel, free of charge, to use about 10 to 15 square meters of the said 20-storey building since allowing such usage is not for monetary consideration; 3) In the event that the subject property will be sold, the sale would be subjected to the 6% capital gains tax pursuant to Section 24 and/or 27 of the National Internal Revenue Code; and 4) Since the property owners will not receive any rental from the said property, such owners will not be subject to income tax or creditable withholding tax for Digitel's use of the said property. It is represented that Digitel is interested in occupying a very small portion, approximately ten (10) to fifteen (15) square meters of a twenty-storey building with complete structure but without any finishing; that the structure is built on two (2) adjacent lots covered by Transfer Certificate of Title (TCT) Nos. 167510 and 167511 located at EDSA corner Chino Roces Avenue in Makati City; that said property was acquired by its present owners more than fourteen (14) years ago; that no improvement or additional investment has ever been introduced thereon; that the said property has never been offered for rent or actually leased to anybody during the owners' entire possession thereof; that the subject property remained idle from the time it was acquired, fourteen (14) years now; that the present owners, none of whom is engaged in the real estate business, held such property as capital asset; and that the owners are willing to allow Digitel to use said building for free in the meantime that it has not yet obtained permanent location for its telecommunications facilities. In reply, please be informed that your opinion is hereby confirmed as follows: (1) Capital assets is negatively defined under Section 39(A)(1) of the Tax Code of 1997 to mean as "property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer." HTSAEa From the foregoing provision of the Tax Code, it is clear that the aforestated property is a capital asset since: (1) it is not used in business; (2) it does not form part of the inventory; (3) it is not held for speculative purposes; and (4) it is not subject to depreciation. (2) Pursuant to Section 3(b) of Revenue Regulations No. 7-2003, real property, not used in trade or business shall be treated as capital asset. Moreover, monetary consideration or the presence or absence of profit in the operation of the property is not significant in the characterization of the property. The subject property, therefore, remains a capital asset even if the owners allow your company, free of charge, to use about 10 to 15 square meters of the 20-storey building. (3) Capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, shall be subject to the six percent (6%) capital gains tax imposed under Section 24(D)(1) or 27(D)(1) of the Code, as the case may be, based on the gross selling price or current fair market value as determined in accordance with Sec. 6(E) of the Code, whichever is higher. Accordingly, in the event that the subject property will be sold, the sale thereof shall be subject to the six percent (6%) capital gains tax based on the gross selling price or fair market value, whichever is higher, pursuant to Section 24(D)(1) or 27(D)(5) of the Code, as the case may be. (4) In BIR Ruling No. 270-04 dated May 17, 2004, this Office has ruled as follows: "A contract of lease is consensual and only the owner has the right to fix the rents. Considering that in the instant case, the lease agreements provide for a rent-free period, i . e , KSA cannot require the lessee to pay any rental during this period or set apart, without restriction, a specified amount of money in its favor, to cover such payment, KSA cannot be said to have derived taxable income during the rent-free period for the lease of the said property, since no monetary consideration or other material consideration that would flow to, or any amount credited to the lessee for the account of KSA. Accordingly, KSA cannot be deemed to have realized, whether constructively or otherwise, income for the lease of the above-mentioned property during the rent-free periods granted in the Contract of Lease for the said taxable year." In the instant case, the owners of the above subject property are willing to allow Digitel to use a small portion of the same for free in the meantime that it has not yet obtained a permanent location for its telecommunications facilities. Thus, it is apparent that said owners will not derive any income therefrom, and consequently, they will not be subject to income tax nor to the withholding tax. Finally, since the owners of the subject property are not engaged in the business of leasing realties, nor will they be leasing the above subject property to Digitel, the use of the subject property by Digitel, therefore, is not subject to value-added tax under Section 108 of the Tax Code of 1997. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service