General Milling Corporation

October 25, 2007 BIR RULING [DA-567-07] Sec. 27 (D) (5); 39 (A); RR 7-2003 UN-276-95; DA-397-2000 DA-219-05; DA-654-06 General Milling Corporation 33/F, Export Bank Plaza Gil Puyat corner Chino Roces Avenue Makati City Attention: Mr. Cesar G. Avila, Jr. Director for Accounting Gentlemen : This refers to your letters dated March 2, 2007 and October 4, 2007 requesting confirmation of the tax consequence of the sale by General Milling Corporation (GMC) of its idle land. aDACcH It is represented that GMC is a domestic corporation established under the laws of the Republic of the Philippines. GMC is engaged in the manufacture of snack foods, milling of flour and feeds. It has a land in Barangay Ugong, Pasig City, covered by Transfer Certificate of Title No. 401450, which was used as a plant site for its operations. The said plant has been totally shutdown since September 20, 2004 and was officially closed on February 5, 2005 due to labor dispute. From then on, the property has remained idle and never was utilized by GMC in its operations nor was it leased to third party. The said property was reclassified by GMC as capital asset and is recorded in its books as part of its other assets. The corresponding tax declarations for the machineries previously installed in the said property were cancelled since they were either moved to San Pedro or Cebu plant. GMC offered for sale to the public its above plant in Ugong, Pasig. GMC, however, realized that the above property could be more attractive to prospective buyers and/or land developers if the structures found thereon will be demolished. GMC wanted to demolish the buildings and building improvements in 2005, however, it did not pursue the demolition as it found the P40 million cost of demolition expensive. The cash outlay is too much for GMC, which has a negative bottom line, and that said undertaking is without a definite return. In September 2007, GMC finally found another contractor to demolish the structures, this time with very reasonable charge at P14.9 million, hence, the demolition of the same this month of October, 2007. From the foregoing, it is your view that the sale by GMC of its idle land, classified as capital asset, is subject to the 6% capital gains tax and the 1.5% documentary stamp tax only. As such, said sale is not subject to the value-added tax. cTDECH In support of your request, you submitted the following: 1) Documents relative to the closure of business operations of GMC plant in Ugong; 2) Cancellation of the corresponding Tax Declarations due to closure of business operations in Ugong plant site; 3) Demolition and Clearing Works Agreement; and 4) Other pertinent documents. In reply, please be informed that the term "capital assets" as negatively defined in Section 39 (A) (1) of the Tax Code of 1997, 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 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 allowances for depreciation provided in Subsection (F) of Section 34, or real property used in trade or business of the taxpayer. AHCETa In view of the foregoing, and inasmuch as the aforementioned parcel of land of GMC is no longer used in its business since 2004 and that it lie idle from then on, the said realty, accordingly, are considered as capital asset. Consequently, the sale of said parcel of land is subject to the 6% capital gains tax under Section 27 (D) (5) of the Tax Code of 1997, as amended. Likewise, the said sale is subject to the documentary stamp tax imposed under Section 196 of the same Tax Code. (BIR Ruling No. DA-397-2000 dated November 20, 2000 citing UN-276-95 dated July 26, 1995; Rev. Regs. No. 7-2003) Moreover, the sale of the above property by GMC, treated as its capital asset, is not subject to the 12% value-added tax imposed under Section 106 of the 1997 Tax Code, as amended, in accordance with Sec. 4.109-1 (B) (p) of Revenue Regulations No. 16-2005, implementing Republic Act No. 9337. (BIR Ruling No. DA-219-2005 dated May 5, 2005 cited in BIR Ruling Nos. DA-653 & 654-2006, both dated November 7, 2006) 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. HTcADC Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service