Sycip Gorres Velayo & Co.

December 28, 2007 BIR RULING [DA-696-07] 27 (A); 39 (A) (1); 106 (A) R.R. 7-2003; R.R. 16-2005 DA-301-2004; DA-669-2004; VAT Ruling Nos. 046-98 & 034-2001; DA-669-2004 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Emmanuel C. Alcantara Co-Head, Tax Services Gentlemen : This refers to your letter dated December 10, 2007 requesting on behalf of your client, Ayala Life Assurance Incorporated ("Ayala Life") for confirmation that its real property referred to as the Ayala Life Building is considered an ordinary asset pursuant to Section 3 (b) Revenue Regulations No. 7-2003; that accordingly, the sale thereof is subject to the creditable withholding tax at the rate of 6% under Section 2.57.2 (J) (c) of Revenue Regulations No. 6-2001 and consequently the ordinary income tax under Section 27 (A) of the Tax Code of 1997, as amended; that moreover, Ayala Life, being a domestic company engaged in the life insurance business is covered by the percentage tax under Title V of the 1997 Tax Code and is therefore not subject to the 12% VAT pursuant to Section 4.109-1 (B) (1) (e) (1) of Revenue Regulations (RR) No. 16-2005, as amended by RR 4-2007 on the sale of the Ayala Life Building; and that likewise, the sale of the same real property is not subject to the premium tax imposed under Section 123 of the 1997 Tax Code. BACKGROUND It is represented that Ayala Life is a corporation duly organized and existing under the laws of the Philippines with Securities and Exchange Commission Registration No. PW-149; that it is duly authorized by the Insurance Commission as a life insurance company; that prior to the effectivity of the VAT Law (Executive Order No. 273) on January 1, 1988, Ayala Life acquired an office building with a total floor area of 16,146 square meters located along Ayala Avenue, Makati City, herein referred to as the Ayala Life Building; that no input tax attributable to the acquisition of the said property was refunded or credited against other internal revenues taxes of Ayala Life; that the Ayala Life Building has a total floor area of 16,146 square meters composed of two contiguous buildings identified as Main Building which has eleven (11) floors and the Annex Building which has (13) floors; that the building was previously used by Ayala Life as its principal place of office before its transfer to the new Ayala Life-FGU Center sometime in 2001; that at present, only a small portion of the ground floor or 2% of the total floor area of the building was held for lease to tenants; and that Ayala Life will sell the Ayala Life Building in 2008. In reply please be informed that ordinary assets are defined under Section 2 (b) RR No. 7-2003 as all properties specifically excluded from the definition of capital assets under Sec. 39 (A) (1) of the Code, namely: 1. Stock in trade of a taxpayer or other real 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 2. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or 3. Real property used in trade or business ( i.e., buildings and/or improvements) of a character which is subject to the allowance for depreciation provided for under Sec. 34 (F) of the Code; or aCITEH 4. Real property used in trade or business of the taxpayer." (emphasis supplied) Inasmuch as Ayala Life previously occupied the Ayala Life Building as its principal place of business prior to 2003, the property should be considered an ordinary asset which is not subject to capital gains tax of six percent (6%) under Section 27 (D) (5) Tax Code of 1997, as amended, but is subject to the creditable withholding tax at the rate of 6% pursuant to Section 2.57.2 (J) (c) of Revenue Regulations No. 6-2001, as amended and consequently to the ordinary income tax under Section 27 (A) of the Tax Code of 1997. Moreover, since Ayala Life is a domestic company engaged in the life insurance business, it is subject to the percentage tax under Title V (Other Percentage Taxes) of the Tax Code of 1997 and is exempt from VAT pursuant to Republic Act (RA) No. 9337. Section 4.108-3 (i) of RR No. 16-2005 or the Consolidated Value-Added Tax Regulations of 2005 which provides: "(i) Non-life insurance companies including surety, fidelity, indemnity and bonding companies are subject to VAT. They are not liable to the payment of the premium tax under Sec. 123 of the Tax Code. "Non-life insurance companies" . . . as distinguished from insurance on human lives, health, accident and insurance appertaining thereto or connected therewith which shall be subject to the percentage tax under Sec. 123 of the Tax Code ." (emphasis supplied) Accordingly, Ayala Life being a life insurance company is subject to the percentage tax under Title V of the 1997 Tax Code and not subject to the 12% VAT pursuant to Republic Act No. 9337 as amended by Revenue Memorandum Circular (RMC) No. 7-2006. Moreover, considering that no input tax had been claimed from the acquisition of the building as evidenced by the Tax Declaration of Real Property issued for the Ayala Life Building which shows that the property was declared for tax purposes even prior to the effectivity of the VAT Law (Executive Order No. 273) on January 1, 1988 and since at least 98% of the entire floor area of the property remains vacant and idle from the time of its acquisition, the Ayala Life Building is considered property not primarily held for sale or for lease in the ordinary course of business. The sale thereof is deemed not in the ordinary course of Ayala Life's trade or business, a non-VAT registered life insurance company which is not subject to the 12% VAT. However, although Ayala Life is covered by the percentage tax under Title V of the Tax Code, its sale or disposition of the Ayala Life Building is not subject to the 5% premium tax imposed under Section 123 of the Tax Code, which provides: "Section 123. Tax on Life Insurance Premiums . There shall be collected from every person, company or corporation (except purely cooperative companies or associations) doing life insurance business of any sort in the Philippines a tax of five percent (5%) of the total premium collected, whether such premiums are paid in money, notes, credits or any substitute for money; . . ." In view thereof, since the sale of the Ayala Life Building is merely incidental to the main line of business of Ayala Life, it is not subject to the 5% premium tax imposed under Section 123 of the Tax Code of 1997 for the reason that the same is levied only on the total premiums collected representing the consideration for assuming and carrying the risk on the life of the insured whether such premiums are paid in money, notes, credits or any substitute for money. (BIR Ruling No. 224-90 dated November 29, 1990, BIR Ruling No. DA-513-99 dated September 3, 1999 ). This ruling is being issued on the basis of the foregoing facts as represented. However, upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. EIAHcC Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service