BIR Ruling [DA-642-06]

October 27, 2006 BIR RULING [DA-642-06] 27 (D) (5); 014-03 Gerodias Suchianco Estrella Suite 2404 Discovery Center 25 ADB Avenue, Ortigas Center Pasig City Attention: Atty. Maria Farah Z.G. Nicolas-Suchianco and Atty. Amabelle Grace G. Mascardo Gentlemen : This refers to your letter dated September 11, 2006 stating that your client, Philippine Ink Corporation (PIC),is a domestic corporation duly organized and existing under the laws of the Philippines; that the primary purpose of the corporation is to engage in the business of manufacturing, processing, exporting, importing, buying, selling, and generally dealing in the wholesale and retail of goods, particularly ink; that it is neither a real estate broker nor a property developer; that PIC owns real properties located in 153 Blumentritt Street, San Juan, Metro Manila and covered by TCT Nos. (47521)-40672 and (417399)-40673 (the Properties);that PIC is currently in serious negotiation to sell the Properties since the same are no longer used in its business, that the Properties were used by PIC as the site for its ink factory (the San Juan Plant) until May 30, 2003, when the San Juan Plant was partially destroyed by fire; that the destruction of the San Juan Plant was of such gravity that would entail huge capital expenditure on PIC's part before the same can be brought back to operating condition; that on June 30, 2003, PIC's Board of Directors decided to cease using the San Juan Plant and transferred its operations altogether to its Valenzuela Plant; and that since then, the Properties were left idle and were no longer used by PIC for its business. Based on the foregoing representations, you now request for confirmation of your opinion that the above-mentioned properties which have been idle and not used in business should be classified as capital assets and therefore subject to the 6% capital gains tax and the corresponding documentary stamp tax but not limited to the 12% value-added tax (VAT). In reply thereto, please be informed that Section 27(D)(5) of the Tax Code of 1997, as implemented by Revenue Regulations No. 7-2003, provides "(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. A final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price or fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings." It is undisputed that the yardstick for determining whether the property is capital asset or ordinary asset is the actual use of the said property. Thus, if the property is not actually used in trade or business of the taxpayer, whether or not connected with his trade or business, or not held for lease or sale to customers, it will be classified as a capital asset. Moreover, if the property is merely held for investment purposes and remains vacant and idle, it is deemed a capital asset. caDTSE This is fortified in BIR Ruling No. 014-2003 dated October 28, 2003 ,where this Office ruled that "It is apparent under the foregoing provision that for a property to be considered an ordinary asset it must be actually used in the business of the corporation. Accordingly, on the condition that Wendell Holdings Co.,Inc. is not habitually engaged in the real estate business as represented, the property under consideration is a capital asset. The property was neither held primarily for sale to customers nor actually used in the business of Wendell Holdings Co.,Inc. ...The property is not actually used in the business of Wendell Holdings Co.,Inc. as it has remained idle and undeveloped. Therefore, the sale of the property under consideration is a sale of a capital asset, not an ordinary asset. As such, the transaction is subject to capital gains tax of 6% under Section 27(D)(5) and not to the creditable withholding tax." The phrase "taxpayers engaged in the real estate business" refers collectively to real estate dealers, real estate developers, and/or real estate lessors. Conversely, the term "taxpayer not engaged in the real estate business" shall refer to persons other than real estate dealers, real estate developers and/or real estate lessors. A taxpayer whose primary purpose of engaging in business, or which Articles of Incorporation states that its primary purpose is to engage in the real business shall be deemed to be engaged in the real estate business for purposes of these Regulations. (Sec. 2(g), Revenue Regulations No. 7-2003) Inasmuch as PIC is not primarily engaged in real business, but is merely a company organized to manufacture, process, export, import, buy, sell and generally dealing in the wholesale and retail of goods, particularly ink, it is deemed not engaged in the real estate business. Consequently, the proposed sale of the aforesaid properties is deemed a sale of capital assets subject to the 6% final capital gains tax but not subject to the 12% VAT. Moreover, real property, which is idle and vacant and had not been used in the ordinary course of trade or business nor had it ever been classified as property of a kind which would properly be included in the inventory if on hand at the close of the taxable year, nor had it ever been held by the taxpayer primarily for sale to customers in the ordinary course of trade or business, the income derived from the sale thereof is not subject to the expanded withholding tax under Section 2.57.2(J) of Revenue Regulations No. 2-98, but only to the 6% capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997 and to the documentary stamp tax under Section 196 of the same Code, based on the gross selling price or fair market value (FMV) as determined in accordance with Section 6(E) of the Code, whichever is higher. Lots or improvements, classified as "investment properties", which are idle, unproductive and unimproved since the time of acquisition, and do not fall under any of the assets enumerated under Section 39(A)(1) of the Tax Code of 1997 and 2(b) of Revenue Regulations No. 7-2003 are classified as capital assets, the sale of which is subject to 6% capital gains tax, DST of 1.5% but exempt from 10% (now 12%) VAT. ( BIR Ruling No. DA152-04 dated March 31, 2004 ) Accordingly, we hereby confirm your opinion that the proposed sale of the abovementioned properties which have remained idle and considered as capital asset, is: (1) subject to the capital gains tax of 6% pursuant to Section 27(D)(5) of the Tax Code of 1997; TDCaSE (2) subject to DST at the rate of P15.00 for each P1,000.00 or fractional part thereof in excess of P1,000.00, or 1.5% of the consideration or fair market value of the properties, whichever is higher, pursuant to Section 196 of the Tax Code of 1997; and (3) exempt from 12% VAT, the property not being primarily held and offered for sale or lease to customers in the ordinary course of PIC's trade or business, as provided under Section 109(w) of the Tax Code of 1997. ( BIR Ruling No. DA270-04 dated March 17, 2004 ) 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner