BIR Ruling [DA-687-99]

December 14, 1999 BIR RULING [DA-687-99] Equites Holdings, Inc . 222 E. Rodriguez Sr. Blvd. Quezon City Attention: Mr . Abelardo S . Termullo Gentlemen : This refers to your letter dated November 23, 1999 requesting for a confirmatory ruling on the following, among others: 1) that the installment sales proceeds in the sale of four parcels of contiguous lands which are not actually used in trade or business and, therefore, treated as capital assets is subject to the six percent (6%) capital gains tax; 2) that the sale is not subject to the ten percent (10%) value added tax; and 3) that in determining the zonal value of the said properties, the zonal values of the interior portions thereof will prevail over the zonal values of the frontage as the same is practically insignificant compared to the huge depth of the lots. It is represented that Equites Land, Inc. was incorporated on August 24, 1995 primarily, to engage in real estate business; that on August 28, 1995, its authorized capital stock was increased from P6 million divided into 60,000 shares to P130 million divided into 1,300,000 shares both with a par value of P100 per share; that relative to the increase, four parcels of land with a total area of 75,021 sq. m. located at Barangay Kalusugan, Quezon City with an aggregate book value of P123,806,462 were assigned by a major stockholder to the company in exchange for 1,238,065 shares of stock; that on April 27, 1999, Equites Land, Inc. changed its name to Equites Holdings, Inc. as well as its primary purpose from that of a real estate business to a mere holding company; and that from August 24, 1995 to date, the company never started commercial operations. It is further represented that the properties in question were previously devoted to industrial use as a manufacturing facility by a car assembler until 1996; that the buildings, machineries and all other improvements were subsequently dismantled and removed from the premises; that when the properties were acquired by the company, it expected to establish therein a viable industry; that the financial crisis in 1997 discouraged any favorable options to use the properties and for three (3) years until now, the properties have been idle and abandoned; that no improvements have been introduced thereon and it has laid bare since 1997; that, although the properties are idle and undeveloped, the classification of the properties in the records of the City Assessor's Office remained to be "industrial"; that the Housing and Land Use Regulatory Board (HLURB) has classified 52,800 sq. m. or 70% of the properties as "residential"; that with the present financial crisis and "residential" classification of practically the entire the property by the HLURB, the company is apprehensive that its planned industrial use of the properties is already impossible and its considering to dispose of the property; and that due to the depressed condition of real estate at present, the company expects to sell the properties on installment basis for P9,000 per sq. m. for all the lots. In connection therewith, you now request confirmation of your opinion that 1. The properties in question are classified as capital assets; 2. The sale of the said properties subjects the capital gain therefrom to the 6% capital gains tax based on the gross selling price of P9,000 per sq. m. which is higher than the zonal value of the bulk of the properties in question; 3. The capital gains tax is payable on every installment due as the payment of the total selling price of the said properties with an 11% initial payment and the balance in nine (9) equal semi-annual installments qualifies as installment sale under Section 49 (B) of the Tax Code, as amended. 4. The sale of the properties which is classified as capital asset is not subject to the value added tax. 5. The Certificate Authorizing Registration of the properties in the name of the buyer can be issued upon payment of the capital gains tax due on the first installment; 6. The documentary stamp tax imposed under Section 196 of the Tax Code, as amended, is due and payable within (10) days of the month following the execution of the Deed of Absolute Sale conveying title of the properties to the buyer. In reply, please be informed that pursuant to Section 27(D)(5) of the Tax Code of 1997, a final tax of six percent (6%) is imposed on the gains presumed to have been realized in the sale, exchange or disposition of lands and/or buildings which are not actively used in the business of a corporation which are treated as capital assets based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher. From the foregoing provision of the Tax Code of 1997, it is clear that the said properties are being held by your company as capital assets since: 1) they are not used in trade or business; 2) they do not form part of its inventory; 3) they are not held for speculative purposes; and 4) they are not subject to depreciation (BIR Ruling No. 133-98 dated September 15, 1998). The facts that the properties are classified as industrial for real estate tax purposes will not affect the classification of the properties as capital assets for capital gains tax purposes [BIR Unnumbered Ruling 255-94 dated September 4, 1994]. prcd Thus, being capital assets, the sale of said properties are not subject to the ten percent (10%) value added tax. The new capital gains tax of six percent (6%) should be based on the gross selling price of P9,000 per sq. m. considering that the same is higher than the current zonal value of the bulk of the properties in question. Likewise, it is further considered that the two parcels of land with a total area of 2,989 sq. m., out of the total area of 75,021 sq. m. fronting E. Rodriguez Sr. Blvd. will be used only as ingress and egress in going into and out of the main properties; and that the present market condition for real estate is depressed such that the prices of realty has gone down quite substantially since the economic crisis which starter in July 1997. Since the total selling price will be paid with an initial payment of 11% thereof and the balance in nine (9) equal semi-annual installments, the sale of said properties qualify as an installment sale pursuant to Section 49(B) of the Tax Code of 1997. Such being the case, the six percent (6%) capital gains tax is reportable on installment basis, that is, the seller may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year, which the gross profit realized or to be realized when payment is completed, bears to the total contract price. Upon payment of the corresponding capital gains tax due on the initial payment and the documentary stamp tax due on the total selling price within ten (10) days upon execution of the Deed of Absolute Sale, the corresponding Certificate Authorizing Registration can be issued for the issuance of the new Transfer Certificate of Title in the name of the buyer [Section 7, Revenue Regulations No. 13-85 dated December 12, 1985]. Accordingly, your queries are answered affirmatively as follows: A. That the properties in question not being used in business or just held as capital assets are correctly treated as capital assets. B. That the sale thereof should be subject to the new capital gains tax of six percent (6%) based on the gross selling price of P9,000 per sq. m. which is higher than the zonal value of the bulk of the properties in question. C. That the capital gains tax is due and payable on every installment received as the sale of the properties qualify as installment sale under Section 49(B) of the Tax Code of 1997 considering that the initial payment does not exceed 25% of the total selling price. prcd D. That the sale of the properties in question is not subject to the 10% value added tax is correct the same not being held primarily for sale to customers or held for lease in the ordinary course of trade or business. E. That the Certificate Authorizing Registration of the properties in the name of the buyer may be issued by the Revenue District Officer where the properties are located upon payment of the capital gains tax dues on the initial payment. F. That the documentary stamp tax due on the total selling price is due and payable within 10 days from execution of the Deed of Absolute Sale on Installments. 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)