BIR Ruling [DA-620-06]

October 18, 2006 BIR RULING [DA-620-06] 27 (D) (5); 39 (A) (1); RR 7-2003; DA-301-2004 Quiason Makalintal Barot Torres & Ibarra 21st Floor, Robinsons-Equitable Tower 4 ADB Avenue corner Pedro Poveda Street 1605 Ortigas Center, Pasig City, Philippines Attention: Atty. Benedict R. Tugonon Gentlemen : This refers to your letter dated August 14, 2006 requesting for confirmation of your opinion that: 1. The vacant and/or idle land of YCLA Sugar Development Corporation ("YCLA") located at Brgy. Bian, Municipality of Bian, Province of Laguna, with an area of 246,035 square meters covered by Transfer Certificate of Title Nos. T-110647, T-196720 & T-196721 of the Register of Deeds of the Province of Laguna (the "Property"),which were never used in its trade or business, nor subjected to depreciation, nor included in its stock in trade or inventory, nor held primarily for sale or lease to customers in the ordinary course of its business, and never rented out to any one since its acquisition, are classified as capital asset in the hands of YCLA; 2. The sale, transfer or assignment of the said vacant and/or idle real properties classified as capital asset in the hands of YCLA is subject to the 6% capital gains tax and the documentary stamp tax, pursuant to Sections 27 (D) (5) and 196 (b),respectively, of the National Internal Revenue Code, as amended (the Tax Code); 3. The sale, transfer or assignment of the said vacant and/or idle real properties, not being used in the ordinary course of the trade or business of YCLA is not subject to value-added tax ("VAT") imposed under Section 106 (A) (1) (a) of the Tax Code. YCLA is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines with address at Old Stable, Canlubang, Calamba City, Province of Laguna. CDEaAI The Property is a piece of undeveloped, unimproved, idle, vacant, and raw land and has never formed part of YCLA's inventory for sale to customers and has not been used in its trade or business since the date of its acquisition. In the audited financial statements of YCLA, the Property is reflected as an investment and not as part of its stock in trade or inventory. In reply, please be informed that the term "capital asset" as negatively defined in Section 39(A)(1) of the 1997 Tax Code, as amended, 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 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. Furthermore, Section 3(4) of Revenue Regulations ("RR") No. 7-2003 provides that all real properties acquired in the course of trade or business by a taxpayer habitually engaged in the sale of real estate shall be considered as ordinary assets. As defined under Section 2(g) of RR 7-2003, taxpayers engaged in the real estate business shall refer collectively to real estate dealers, real estate developers, and/or real estate lessors. A taxpayer whose primary purpose of engaging in business or whose Articles of Incorporation states that its primary purpose is to engage in the real estate business shall be deemed to be engaged in the real estate business for purposes of the regulations. Considering that YCLA is not a real estate dealer, real estate developer, and/or real estate lessor and its primary purpose is to engage in manufacturing business, the parcels of land to be sold by YCLA are not stock in trade or other real property of a kind which would properly be included in YCLA's inventory if on hand at the close of the taxable year. Nor are they real property held primarily for sale or lease to customers in the ordinary course of trade or business. ( BIR Ruling Nos. DA-163-05 dated April 14, 2005 and 014-03 dated October 28, 2003 ). Furthermore, in BIR Ruling No. 014-03, dated October 28, 2003, it was ruled that for a property to be considered an ordinary asset, it must be actually used in the business of the corporation. The BIR stated that on the condition that the taxpayer concerned was not habitually engaged in the real estate business, the property not actually used in the business of the taxpayer, the same having remained idle and undeveloped, was considered a capital asset. In view of the foregoing, it is the considered opinion of this Office that the income to be derived by YCLA from the sale of the above-mentioned parcels of land is not subject to the creditable/expanded withholding tax under Section 2.57.2(J) of RR 2-98, as last amended by RR 30-2003, but to the capital gains tax of six percent (6%) based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997, as amended by Republic Act ("RA") No. 9337, whichever is higher, of such parcels of land pursuant to Section 27(D)(5) of the same Code. Moreover, under Section 109(p) of the Tax Code, as amended by RA 9337, the sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business shall be exempt from VAT. Considering that YCLA is primarily engaged in manufacturing, more particularly in purchasing, selling, and dealing in, at wholesale or retail, all kinds or types of manufactured and unmanufactured products, the above-mentioned parcels of land are not being held by YCLA primarily for sale to customers or held for lease in the ordinary course of trade or business. The sale by YCLA of the parcels of land shall be exempt from VAT. ( BIR Ruling Nos. DA-130-A-2003 dated April 25, 2003 and VAT Ruling No. 034-2001 dated June 13, 2001 ). HICSaD Finally, the deed of sale conveying the above-mentioned parcels of land shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6(E) of the same Code, whichever is higher. 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