BIR Ruling [DA-519-04]

October 6, 2004 BIR RULING [DA-519-04] 39; 27; RR 7-2003; BP 220 # 027-2002; DA-009-2003 Winner Real Estate Development Corporation T. Santiago St., Canumay, Valenzuela City Attention: Mr. Henry Ong Executive Vice-President Gentlemen : This refers to your letter dated August 17, 2004 stating that your corporation, though incorporated in 1989 as a real estate corporation, has not engaged in the real estate business since its inception; that as a result of which, the Board of Directors has decided to sell and dispose of its real property which could probably lead to the dissolution of your corporation. Based on the foregoing, you now ask the following queries, viz : 1. Will the sale of the real property owned by Winner Real Estate Development Corporation ("Winner") be considered as sale of capital asset or ordinary asset? 2. In either case, what is the rate/percentage of capital gains tax or other taxes to be paid? 3. Will the sale of the property to the government for low cost housing development entitle the Corporation to a special tax rate? In rely, please be informed as follows: Query No. 1 The sale of the real property owned by Winner shall be considered as sale of an ordinary asset. Section 3(a)(2) of Revenue Regulations (RR) No. 7-2003 provides, viz : "SEC. 3. GUIDELINES IN DETERMINING WHETHER A PARTICULAR REAL PROPERTY IS A CAPITAL ASSET OR ORDINARY ASSET. a. Taxpayers engaged in the real estate business . Real property shall be classified with respect to taxpayers engaged in the real estate business as follows: xxx xxx xxx 2. Real Estate Developer . All real properties acquired by the real estate developer, whether developed or undeveloped as of the time of acquisition, and all real properties which are held by the real estate developer primarily for sale or for lease to customers in the ordinary course of his trade or business or which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year and all real properties used in the trade or business, whether in the form of land, building, or other improvements, shall be considered as ordinary assets." In relation thereto, Section 3(a)(4)(d) of the same Regulations further provides, to wit: "d. Taxpayers originally registered to be engaged in the real estate business but failed to subsequently operate . In the case of subsequent non-operation by taxpayers originally registered to be engaged in the real estate business, all real properties originally acquired by it shall continue to be treated as ordinary assets." Accordingly, the fact that Winner has not engaged in the real estate business since its incorporation in 1989 notwithstanding, all real properties originally acquired by Winner shall continue to be treated as ordinary assets. Query No. 2 The facts being considered, the sale of land and/or building classified as ordinary asset and other real property (other than land and/or building treated as capital asset), regardless of the classification thereof, all of which are located in the Philippines, shall be subject to the creditable withholding tax (expanded) under Sec. 2.57.2(J) of RR No. 2-98, as amended, and consequently, to the ordinary income tax under Sec. 27(A) of the Tax Code of 1997. In lieu of the ordinary income tax, however, domestic corporations may become subject to the minimum corporate income tax (MCIT) under Sec. 27(E) of the same Code, whichever is applicable. [Sec. 4(c)(ii), RR No. 7-2003] Query No. 3 Pursuant to Section 20 of R.A. No. 7279, pertinent portion of which reads: "Sec. 20. Incentives for the Private Sector Participating in Socialized Housing . To encourage greater private sector participation in socialized housing and further reduce the cost of housing units for the benefit of the underprivileged and homeless, the following incentives shall be extended to the private sector: xxx xxx xxx (d) Exemption from the payment of the following: (1) Project-related income taxes; (2) Capital gains tax on raw lands used for the project; xxx xxx xxx;" Such being the case, your sale of your property to the government for socialized housing is exempt from the payment of the creditable withholding tax. However, it is observed that documentary stamp tax is not one of the taxes covered by the tax exemption clause under Sections 20 and 32 of R.A. 7279. HTDCAS Accordingly, Winner being the landowner, is liable to pay the documentary stamp tax on the document conveying the property to the corporation under the Socialized Housing Program as imposed under Section 196 of the Tax Code of 1997 based on the actual consideration paid by the government, as vendee, to Winner, as the landowner. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group