BIR Ruling [DA-669-04]

December 28, 2004 BIR RULING [DA-669-04] Sec. 109 (w) VAT Ruling Nos. 046-98 & 034-01; DA-130-2003-A Atty. Miguel Romualdo T. Sanidad Phinma Plaza, Level 11, 39 Plaza Drive Rockwell Center, Makati City 1200 S i r: This refers to your letters dated November 18 and 24, 2004 seeking on behalf of United Industrial Bag Company, Inc. ("UIBC") for confirmation of your opinion that the absolute assignment of several parcels of land together with improvements thereon consisting of buildings and other permanent structures in payment of UIBC's loan is exempt from the 10% value-added tax. It is represented that UIBC is engaged in the business of making paper bags for cement companies; that through borrowed funds from Solidbank Corp. (now Metropolitan Bank and Trust Company) and Rizal Commercial Banking Corporation (RCBC), it was able to double its capacity; that UIBC ceased operations in October 2001, retiring all its personnel as it has been incurring losses since 1997; that on April 2, 2002, UIBC, by way of absolute assignment of several parcels of land together with improvements thereon consisting of buildings and other permanent improvements valued at P42,000,000 paid its unpaid liabilities and obligations to RCBC amounting to P42,000,000; that the buildings were used to house UIBC's paper bag converting equipment, machinery and related parts; that the aforementioned parcels of land together with improvements thereon consisting of buildings and other permanent structures assigned to RCBC in payment of UIBC's loan were acquired and/or constructed prior to 1996, the effectivity of EVAT Law; and that since the parcels of land and improvements absolutely assigned to RCBC are not real properties held for sale to customers or held for lease in the ordinary course of trade or business of UIBC inasmuch as it was engaged in the business of making paper bags for cement companies, you opine that the assignment is exempt from VAT pursuant to the provision of the Tax Code of 1997. In reply, please be informed that Section 109(w) of the Tax Code of 1997 and Section 4.103(B)(w)(1) of Revenue Regulations (Rev. Regs.) No. 7-95, as amended, provide as follows: "Section 109. Exempt Transactions . The following shall be exempt from value-added tax: "(w) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, house and lot and other residential dwellings valued at One million pesos (P1,000,000) and below; Provided, That not later than January 31st of the calendar year subsequent to the effectivity of this Act and each calendar year thereafter, the amount of One million pesos (P1,000,000) shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office; xxx xxx xxx". "Section 4.103-1. Exemptions . "xxx xxx xxx "(B) Exempt transactions . The following shall be exempt from the VAT: "xxx xxx xxx "(w) The following sales of real properties are exempt from VAT, namely: "(1) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business; . . . . " The term "primary" is defined as "first, principal, chief, leading, or first in order of time, or development, or in intention" ( Black's Law Dictionary, Sixth Edition ). Thus, to be "held primarily for sale or lease," the property must be held with the chief intention of being sold or leased. In VAT Ruling 046-98 , it was held that the sale by Eastern Canumay Industrial Development Corporation of its property to Ultimate Innovations, Inc. is not subject to VAT. In this ruling, Eastern Canumay Industrial Development Corporation, which is engaged in the production of marble and other marble products, owned several properties, one of which was sold to Ultimate Innovations, Inc. Since the property sold is not primarily held for sale in the ordinary course of trade or business, then its sale is not subject to VAT. More recently, in VAT Ruling No. 034-01 , dated June 13, 2001 , it was reiterated that the sale of real property may only be imposed the 10% VAT provided the same is primarily held for sale to customers or held for lease in the ordinary course of trade or business. Since the gas pipeline being sold is not held by FGP Corporation primarily for sale to customers or held for lease in the ordinary course of its trade or business, considering that its business involves the operation of the aforesaid power generating plant, it follows that FGP Corporation is not subject to VAT with respect to the sale of the gas pipeline, pursuant to the aforesaid provision of the Code and its implementing rules and regulations. It is noted that the real properties, specifically the buildings, which were absolutely assigned by UIBC to RCBC used to house the converting equipment, machinery and parts that were used in UIBC's cement paper bags manufacturing business. It is further noted that the assignment was not made in the ordinary course of the regular trade or business of UIBC. Thus, inasmuch as the said properties are not among the stock in trade of UIBC, and due to the fact that UIBC was not primarily engaged in the buying and selling of real properties, nor in the leasing of properties, it follows that the absolute assignment of said real properties is exempt from VAT pursuant to the aforequoted Section 4.103(B)(w)(1) of Rev. Regs. 7-95 implementing now Sec. 109(w) of the Tax Code of 1997. cTACIa 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, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group