BIR Ruling [DA-588-06]

October 3, 2006 BIR RULING [DA-588-06] 109 (w); 27 (D) (5); 60 (B); UN-110-94 Ongkiko Kalaw Manhit & Acorda Law Offices 4th Floor Cacho-Gonzalez Bldg., 101 Aguirre St. Legaspi Village, Makati City Attention: Attys. Mindamar Somera and Marie Abigail M. Asiddao Gentlemen : This refers to your letter dated March 17, 2006 requesting for a ruling on behalf of your client, PAL Pilot's Retirement Fund , as to whether or not the sale of its real properties is subject to value-added tax (VAT) and a final tax of six (6%) percent capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997. It appears that PAL Pilot's Retirement Fund was established for the payment of definite amounts of money to the Philippine Air Line Inc.'s pilots or participants when they are disabled by accident or sickness or are separated or retired from the service and, in the event of death, the payment of definite ascertainable amounts to their lawful heir/s; that as part of its investment portfolio, its property holdings include condominium units and parking slots at the following: (i) ALPAP I Condominium Makati City; (ii) Kasiyahan Homes in Forbes Park, Makati City; (iii) Ayala Life FGU in Ayala Alabang, Muntinlupa City; EcHTCD (iv) ALPAP II Building in Madrigal Business Park, Muntinlupa City; and various lots located at: (i) Ayala Southvale in Bacoor, Cavite; (ii) Peninsula de Punta Fuego in Batangas; (iii) Hacienda Luisita in Tarlac. that to earn and increase funds preparatory to the execution of its purpose, i.e., the distribution of the pilot's equity, it has leased most of the above-described real properties; and that it has appointed the Bank of Philippine Island, Asset Management and Trust Group, a commercial banking corporation duly organized and existing under Philippine laws, as the trustee of its funds; and that with the impending initial distribution of the pilot's equity, it has decided to sell the above-mentioned properties to carry out its obligation under the Plan. You opine that considering PAL Pilot's Retirement Fund is not engaged in the real estate business its sale of its real properties not being held primarily for sale to customers nor being offered for lease in the ordinary course of trade or business, is not subject to VAT. In reply, please be informed that pursuant to Section 109(w) of the Tax Code of 1997, as amended by Republic Act 9337, and as implemented by Section 4.109-1 (p) of Revenue Regulations No. 16-2005, the sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business of the seller is exempt from VAT. Accordingly, since PAL Pilot's Retirement Fund is not engaged in the business of selling real properties in the regular conduct of its trade or business, the sale of its properties is not subject to VAT. cIADTC Moreover, pursuant to Section 60(B) of the Tax Code of 1997, pertinent portion of which reads: xxx xxx xxx "Sec. 60 (B). Exception . The tax imposed by this Title shall not apply to employee's trust which forms part of a pension, stock bonus, or profit-sharing plan of an employer for the benefit of some or all of his employees 1) if contributions are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and 2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees: Provided , That any amount actually distributed to any employee or distribute shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distribute." xxx xxx xxx exemption from income tax of the BIR-qualified employee's trust fund applies to all income or earnings of any kind of property held by it in trust. (Commissioner of Internal Revenue vs. The Hon. Court of Appeals, the CTA, GCL Retirement Benefit Plan, G.R. No. 95022, prom. March 23, 1992). It shall include interest income from bank deposits and yield from deposit substitute as well as gains realized from dealings in real property held as capital asset. Provided, that in the case of the latter, the entire proceeds of the sale shall form part of the retirement fund for the benefit of the member-employees/beneficiaries. In view thereof, the above-described transaction involving the sale of the fund's capital assets wherein the entire proceeds of the sale are earmarked for the duly approved retirement plan established by the employer for the benefit of its employees shall be exempt from capital gains tax and consequently from the creditable expanded withholding tax prescribed under Revenue Regulations No. 2-98, as amended. 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. IHCDAS Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service