Tam-Yap Caga & Associates

December 19, 2007 BIR RULING [DA-671-07] 28 (B) (1); 106 (P) DA-108-04; DA 201-06; Tam-Yap Caga & Associates Unit 408, Ferros Bel-Air Tower, 30 Polaris cor. Durban Streets, Bel-Air, Makati City Attention: Atty. Teresa R. Tare-Yap M a d a m : This refers to your letter dated November 28, 2007 requesting, on behalf of your client, Mona Lisa Development, Inc. (Mona Lisa), for confirmation of your opinion on the tax consequences of the intended sale of a condominium unit owned by Mona Lisa, a non-resident foreign corporation, to a third-party buyer. ACHEaI It is represented that Mona Lisa Development, Inc. ("Mona Lisa") is a non-resident foreign corporation not doing business in the Philippines and duly incorporated under the laws of Delaware and registered to transact interstate business in the State of California, U.S.A.; that on February 16, 2006, Mona Lisa acquired a condominium unit (Unit 9C) of the Rizal Tower, Rockwell Residential Block Condominium Project ("Property"). The Property was acquired by Mona Lisa to be used as the living quarters of Mona Lisa's officers when they come to the Philippines to explore business opportunities in the country; that from the time of its acquisition, the Property was occupied only once in October 2007; that the Board of Directors of Mona Lisa decided that the disposition of the Property rather than maintaining the same will be for the best interest of the company. You now request for a confirmation of the following, that: 1) The applicable capital gains tax on the disposal of the Property by Mona Lisa will be based at 35% of the net gain, and the net gain from the sale of the Property shall be determined by the difference between the gross selling price and the cost of the property in accordance with Revenue Regulations No. 7-03. Accordingly, only the gain from the sale by Mona Lisa of the Property will be subject to 35% final withholding tax pursuant to Section 4 (e) of RR 7-03 and Section 2.57 (I) (1) of RR 2-98, as amended in relation to Section 28 (B) (1) of the Tax Code. 2) The sale of the Property by Mona Lisa is not subject to value-added tax since the Property was acquired primarily for the purpose of housing its visiting officers in the Philippines and not for sale or lease in the ordinary course of its trade or business. HIACEa In reply, please be informed as follows: 1) Under Section 28 (B) (1) of the 1997 Tax Code, as amended, Mona Lisa, being a non-resident foreign corporation shall be subject to 35% on its gross income from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains realized from sale, exchange or disposition of shares of stock in a domestic corporation not traded in the stock exchange. Consequently, said tax shall be withheld pursuant to Section 2.57 (I) (1) of Revenue Regulations No. 2-98, as amended. Section 36 of Revenue Regulations No. 2, otherwise known as "The Income Tax Regulations", defined income as follows: "Income in the broad sense, means all wealth which flows into the taxpayer other than mere return of capital. It includes the forms of income specifically described as gains derived from the sale or disposition of assets." Thus, in the following instances, we have ruled that there is no flow of wealth and hence, no income or profit subject to tax: (a) the payment for ancillary services at cost and (b) the assignment of receivables at cost. (BIR Ruling No. DA-108-04 dated March 9, 2004; BIR Ruling No. DA-641-04 dated December 17, 2004) In a decided case by the Supreme Court, as quoted in DA ITAD BIR Ruling No. 020-06 dated 13 March 2006, the Court further explained "The three elements for the imposition of income tax are: (1) there must be gain or profit, (2) the gain or profit is realized or received, either actually or constructively, and (3) the gain is not exempted by law or treaty from income tax (Commissioner of Internal Revenue vs. Court of Appeals, et al., G.R. No. 108576, January 20, 1999, 102 SCAD 119). IHEaAc Income in tax law is an amount of money coming to a person within a specified time, whether as payment for services, interest or profit from investment. It means cash or its equivalent. It is gain derived and severed from capital, from labor or from both combined. (Ibid.) It should be noted that capital and income are different. Capital is wealth or fund; whereas income is profit of gain or the flow of wealth. The determining factor for the imposition of income tax is whether any gain or profit was derived from a transaction. (Ibid.) In another case involving the sale of real property, albeit by an individual, the Court of Appeals expressly stated that the gross income in the sale of said real property is the gain derived from said sale and not the selling price. Further, it ruled that the acquisition cost must be deducted from the selling price of the property, the balance of which is the gross income subject to income tax. (The People of the Philippines vs. Leonor Litton, CA-G.R. No. 01428, August 1, 1986) Consistent with the foregoing, the gross income in relation to sale of real property located in the Philippines was interpreted by Revenue Regulations No. 7-03 as the gain from the sale thereof, i.e., the difference between the gross selling price and the cost. Consequently, only the gain from the sale by Mona Lisa of the Property shall be subject to 35% final withholding tax pursuant to Section 4 (e) of RR 7-03 and Section 2.57 (I) (1) of RR 2-98, as amended in relation to Section 28 (B) (1) of the 1997 Tax Code, as amended. SCaIcA 2) With regard to the value-added tax, Section 106 in conjunction with Section 109 of the Tax Code provides: "SEC. 106. Value-added Tax on Sale of Goods or Properties . (A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, That the President, upon recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: xxx xxx xxx (1) The term 'goods or properties' shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include: (a) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; . . ." xxx xxx xxx "SEC. 109. Exempt Transactions . Subject to the provisions of Subsection (2) hereof, the following transaction shall be exempt from 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, . . ." Given that the subject unit was acquired primarily for the purpose housing its visiting personnel and not for sale or lease in the ordinary course of its trade or business, the subsequent sale thereof by Mona Lisa shall not be subject to 12% VAT. (BIR Ruling No. DA-006-06 dated January 10, 2006; BIR Ruling No. DA-201-06 dated April 3, 2006; BIR Ruling No. DA-232-06 dated April 11, 2006; BIR Ruling No. DA-305-06 dated May 10, 2006) aScIAC Finally, the subsequent sale of said unit by Mona Lisa shall be subject to documentary stamp tax at the rate of P15.00 for every P1,000.00 or fractional part thereof under Sec. 196 of the 1997 Tax Code, as amended. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. DHEACI Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service