BIR Ruling [DA-508-06]

August 24, 2006 BIR RULING [DA-508-06] Secs. 27; 106; RR 17-2003; DA 009-2003; DA-237-2005 DA 333-2006; VAT 012-02 NBS Law Office 3/F, P & L Building 116 Legazpi St., Legazpi Village Makati City Attention: Atty. Elvin Hayes E. Nidea Gentlemen : This refers to your letters dated July 3, 2006 and August 9, 2006 requesting confirmation of your opinion on the tax consequences of the proposed sale of the two (2) parcels of land owned by Walled City Securities Corporation ("Walled City"). It is represented that Walled City is a domestic corporation established under the laws of the Philippines in 1965 as a family holding corporation, with principal address at Licaros Building, Muralla corner Victoria Streets, Intramuros, Manila; that the primary purpose of Walled City, as enunciated in its Articles of Incorporation is as follows: "(T)o invest in, purchase, or otherwise acquire and own, hold, use, sell, assign, transfer, mortgage, pledge, exchange shares of stock, bonds, debentures, notes, evidences of indebtedness, and other securities or obligations of any corporation or corporations, association or associations, domestic or foreign, for whatever lawful purpose or purposes the same may have been organized and to pay therefore in money or by exchanging therefore stocks, bonds, or other evidences of indebtedness or securities of this or any other corporation and while the owner or holder of any such stocks, bonds, debentures, contracts, or obligations, to receive, collect and dispose of the interest, dividends, and income arising from such property, and to possess and exercise in respect thereof all the rights, powers as any stock so owned." that the said primary purpose of Walled City remains unchanged since its incorporation up to the present; that Walled City acquired real estate properties which include TCT Nos. 220915 and 220916 of the Registry of Deeds of Quezon City; that since the date of acquisition of these properties, they were never utilized by Walled City, nor does it introduced any improvement thereto, and as such the said properties remained idle assets; that no income is derived from the above properties; that Walled City is not engaged in the real estate business consequently, the above properties do not form part of its inventory; and that by the nature of the above properties, they are not subject to depreciation. Based on the foregoing, you are requesting confirmation of your opinion as follows: 1. That the subject properties not being used in business and just held as idle assets are correctly treated as capital assets of Walled City as provided under Section 27(D)(5) of the 1997 Tax Code, as amended; 2. That the sale thereof shall be subject to the capital gains tax of six percent (6%) based on the selling price or fair market value, whichever is higher; 3. That the capital gains tax to be paid thereon is a final tax, and that the gain presumed to be realized from the sale thereof will not be included in the computation of the gross income of Walled City subject to the normal corporate income tax; and 4. That the sale of the subject properties is subject to the documentary stamp tax at the rate of one and a half percent (1.5%) pursuant to Section 196 of the Tax Code, as amended. In reply, please be informed as follows: As negatively defined in Section 39(A)(1) of the Tax Code of 1997, as amended, the term "capital assets" means 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 customer 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. (BIR Ruling No. DA-009-2003 dated January 14, 2003) THDIaC On the other hand, 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 buildings 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. Based on the foregoing and considering that Walled City is a corporation not primarily engaged in the real estate business and that the above subject properties are not even used in its trade or business, thus, properly classified as its capital assets, its sale of the above subject properties, therefore, shall be subject to the 6% capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997, as amended. (BIR Ruling No. DA-237-2005 dated May 31, 2005) Likewise, the said transaction shall not be subject to the 12% VAT imposed under Section 106 of the Tax Code of 1997, as amended, in relation to Section 109 (p) of the same Code, as amended by Republic Act (RA) No. 9337. (BIR Ruling No. DA-333-2006 dated May 19, 2006; VAT Ruling No. 012-2002 dated March 6, 2002) 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 may be paid through the withholding tax scheme. Accordingly, the buyer of the subject capital assets shall withhold the 6% final tax and remit the same to the revenue district office (RDO) having jurisdiction over the place where the properties are located within thirty (30) days from the time of notarization of the transfer document. The gain presumed to be realized from the sale of the subject properties will not be included anymore in the computation of the gross income of Walled City subject to the normal corporate income tax as the same would be subject already to the 6% final tax. (DA-237-2005, supra .) Finally, the sale of the above properties shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, at the rate of one and a half percent (1.5%) based on the consideration contracted to be paid or on the fair market value of the properties as determined in accordance with Section 6(E) of the same Code. 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