BIR Ruling [DA-685-06]

November 30, 2006 BIR RULING [DA-685-06] 27 (D) (5); DA-219-2005; DA-420-2005; DA-012-2006 Sycip Gorres Velayo & Co . 6760 Ayala Avenue 1226 Makati City Attention: Atty. E.C. Alcantara Co-Head, Tax Services Gentlemen : This refers to your letter dated October 5, 2006 requesting on behalf of your client, Union Ajinomoto Realty Corporation ("UARC"), for confirmation of your opinion that various real properties registered in the name of UARC, duly recorded in their books of accounts as "Investments in Real Estate" 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 in the hands of UARC. Accordingly, the sale or disposition of such properties classified as capital assets is subject to capital gains tax under Section 27(D)(5) of the Tax Code of 1997 and to the documentary stamp tax under Section 196 of the same Code. However, the gross receipts derived from the sale of the same is not subject to value-added tax pursuant to Section 4.109-1(B)(p)(1) of Revenue Regulations No. 16-2005 or the Consolidated Value-Added Tax Regulations of 2005. BACKGROUND UARC is a domestic corporation engaged in the real estate business with office at No. 331 Senator Gil Puyat Ave.,Makati City. It is the registered owner of the following lots, ("Subject Properties") to wit: TCT No. Location Acquisition Cost 310901-R San Agustin, San Fernando Pampanga 150,000.00 310902-R San Agustin, San Fernando Pampanga 150,000.00 310904-R San Agustin, San Fernando Pampanga 150,000.00 310905-R San Agustin, San Fernando Pampanga 150,000.00 224065-R Doa Juliana, San Fernando, Pampanga 18,000.00 T-279936 Mabangos, Tanza, Cavite 5,000,000.00 T-353432 Capipisa, Timalan, Tanza, Cavite 4,206,020.00 T-353433 Capipisa, Timalan, Tanza, Cavite 1,341,480.00 T-353437 Capipisa, Timalan, Tanza, Cavite 910,000.00 T-361669 Capipisa, Timalan, Tanza, Cavite 753,155.00 T-102608 Sierra Lakes, Laguna 88,700.00 21318 Basak, Mandaue City, Cebu City 36,416.64 21319 Basak, Mandaue City, Cebu City 260,983.36 21320 Basak, Mandaue City, Cebu City 90,450.00 Total Acquisition Cost 13,305,205.00 UARC acquired the Subject Properties as capital investments and thus never entered into any deal or transaction whatsoever involving the same. No improvement or additional investment has ever been introduced thereon. Neither are properties not included as part of it UARC's inventory. Moreover, the same has never been offered for rent or actually leased to anybody. Since its acquisition by UARC, the registered lots remain raw, vacant, idle and undeveloped. cEaSHC Accordingly, the Subject Properties were consistently booked as "investment" in the Audited Financial Statements of UARC for the taxable year 2003 to 2005 and based on the latest Balance Sheet such "investment" is reflected as follows: ASSETS Current Assets Cash and cash equivalents P43,904,014.00 Other current assets-net 1,570,142.00 Total Current Assets 45,474,156.00 NONcurrent Assets Land held for lease- at cost P69,535,750.00 Investments 13,305,205.00 Total Noncurrent Assets 82,840,955.00 P128,315,111.00 =========== In reply, please be informed that pursuant to Section 27(A) of the Tax Code of 1997, as amended, whenever a corporate real estate developer sells real properties forming part of its inventory or those primarily held for sale to customers, it is considered as sale of ordinary assets subject to corporate income tax. However, when the real estate involved is idle, raw, undeveloped, has never formed part of the real estate developer's inventory for sale to customers and has not been used in trade or business, such real property is properly classified as capital asset subject to a final tax of 6% on the gain presumed to have been realized from the sale or transfer pursuant to Section 27(D)(5) of the Tax Code of 1997, as amended. Thus, if the real property is a land or building which is not actually used in the business of the seller-corporation and is treated as a capital asset, as that term is defined in Section 39(A)(1) of the Tax Code of 1997, as amended, then the final tax of six percent (6%) shall be imposed on the gain presumed to have been realized on its sale, exchange or disposition of such land or building 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, whichever is higher, of such land and/or building. [Section 27(D)(5), Tax Code of 1997] This rule applies, whether or not the seller-corporation is engaged in real estate business. On the other hand, it is only when the real property being sold is an ordinary asset that the withholding tax rates imposed under Sec. 2.57.2 of Revenue Regulations 2-98, as amended, shall apply. ( BIR Ruling No. 27-02 dated July 3, 2002 ) Based on your representations, the Subject Properties of UARC which are idle and vacant and had not been used in the ordinary course of trade nor have they been classified as properties of a kind which would properly be included in the inventory if on hand at the close of the taxable year nor have they 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 Sec. 2.57.2(J) of Revenue Regulations (RR) No. 2-98, as amended by RR 30-2003, but only to the 6% capital gains tax imposed under Sec. 27(D)(5) of the Tax Code of 1997, as amended, 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 same Code, whichever is higher. ( BIR Ruling Nos. DA-217-99 & DA-010-02 dated April 12, 1999 and January 29, 2002 ) Corollarily, only such properties held by a real estate developer primarily for sale or lease to customers in the ordinary course of its real estate development business, and therefore, would be properly included in the inventory of such taxpayer if on hand at the close of the taxable year, or used in his trade or business, are appropriately classified as ordinary assets. Otherwise stated, real properties of a real estate developer other than those enumerated under Section 39(A)(1) of the Tax Code of 1997 and Section 2(b) of Revenue Regulations No. 7-2003 are properly deemed as capital assets. Considering that the Subject Properties were recorded in the books of UARC under the account name of investments; that the same have been idle from their acquisition; that UARC has not introduced any improvements on the said properties; that UARC did not include as part of its inventories the said properties nor did it derive any rental income at all, it is the considered opinion of this Office that the Subject Properties are considered capital assets. As such, the sale of the said properties shall be subject to the capital gains tax under Section 27(D)(5) of the Tax Code of 1997, as amended. Accordingly, we hereby confirm your opinion, as follows: 1. The Subject Properties of UARC, 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) of the Tax Code of 1997, as amended, and Section 2(b) of Revenue Regulations No. 7-2003 and are properly classified as capital assets; 2. The sale of the Subject 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 pursuant to Section 27(D)(5) of the Tax Code of 1997, as amended, and to the documentary stamp tax at the rate of P15.00 for each P1,000 or fractional part thereof in excess of P1,000 based on the consideration or fair market value of the property whichever is higher pursuant to Section 196 of the same Code. ( BIR Ruling Nos. DA-152-2004 dated March 31, 2004, DA-155-2005 dated April 14, 2005 and DA-168-2005 dated April 15, 2005 );and 3. The sale of the aforementioned 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 12% value-added tax. ( BIR Rulings Nos. DA-024-2001 dated February 26, 2001 and DA-397-2000 dated November 20, 2000 ). 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