BIR Ruling [DA-653-06]

November 7, 2006 BIR RULING [DA-653-06] 27 (D) (5); 39 (A) (1); RR 7-2003; DA-301-2004; DA 219-2005; DA-155-2005; DA-420-2005; DA-201-2006 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 following opinions: 1. The vacant and/or idle land of Rudders Industrial Facilities ("Rudders") located at Brgy. Bian, Municipality of Bian, Province of Laguna, with an area of 226,626 square meters covered by Transfer Certificate of Title nos. T-196716, T-196714, T-196722 & T-196723 of the Register of Deeds of the Province of Laguna (the "Property"), which was 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, is classified as capital asset in the brands of Rudders; 2. The sale, transfer or assignment of the said vacant and/or idle real property classified as capital asset in the hands of Rudders 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 property, not being used in the ordinary course of the trade or business of Rudders is not subject to value-added tax ("VAT") imposed under Section 106 (A) (1) (a) of the Tax Code. DAaIEc Background Rudders 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. The Property is a contiguous piece of undeveloped, unimproved, idle, vacant, and raw land and has never formed part of Rudders' 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 Rudders, the Property is reflected as an investment and not as part of its stock in trade or inventory. In reply, please be informed that Section 39(A)(1) of the 1997 Tax Code, as amended, defines capital asset, to wit: "Sec. 39. Capital Gains and Losses . (A) Definitions . As used in this Title (1) Capital Assets . The term ' capital assets ' 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." As stated above, capital assets do not include 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 real property used in trade or business of the taxpayer. Considering that the Property is a contiguous piece of undeveloped, unimproved, idle, vacant, and raw land and has never formed part of Rudders' inventory for sale to customers and has not been used in its trade or business since the date of its acquisition and that in the audited financial statements of Rudders, the Property is reflected as an investment and not as part of its stock in trade or inventory, then the subject property is rightfully classified as capital assets. On the other hand, Section 27(D)(5) of the Tax Code of 1997, as amended, provides, viz. "SEC. 27. Rates of Income Tax on Domestic Corporations . (D) Rates of Tax on Certain Passive Incomes . xxx xxx xxx (5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings . A final tax of six percent (6%) is hereby 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." cCTaSH Furthermore, Section 109 (P) of Republic Act No. 9337 which amends certain provisions of the 1997 Tax Code provides, viz: "SEC. 109. Exempt Transactions . (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax: xxx xxx xxx (P) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business . . ." Thus, the Property covered by Transfer Certificate of Title Nos. T-196716, T-196714, T-196722 & T-196723 of the Register of Deeds of the Province of Laguna are capital assets in the hands of Rudders and the intended sale, transfer or assignment of the Property or any portion or portions thereof is subject to the 6% capital gains tax based on the gross selling price or fair market value, whichever is higher. Moreover, the intended sale of the subject Property or any portion or portions thereof which are considered as capital asset and therefore not primarily held for sale to customers or held for lease in the ordinary course of trade or business is likewise exempt from the value-added tax. Finally, in BIR Ruling No. DA-420-05 dated October 10, 2005 (citing BIR Ruling DA-155-2005 dated April 14, 2005 and BIR Ruling DA 219-2005 dated May 5, 2005 among others), the BIR ruled that the subject realties of Union Ajinomoto Realty Corporation which have remained vacant, idle, unproductive and unimproved since the time of acquisition do not fall under any of the assets enumerated under Section 39(A)(1) of the Tax Code of 1997 and Section 2(b) of Revenue Regulations No. 7-2003 and are properly classified as capital assets; that the sale of the aforesaid properties which are classified as capital assets, is subject to capital gains tax at the rate of 6% on the gain presumed to have been realized from the sale or transfer; and that the sale of the said vacant and/or idle real properties, not being used in the ordinary course of the trade or business of UARC is not subject to the 10% value-added tax. 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