A.M. Yu & Associates

March 22, 2010 BIR RULING [DA-(C-006) 043-10] Sec. 27 (D) (5); RR 7-2003; DA-008-04; DA-040-03; DA-009-03; DA-217-99; 166-81 A.M. Yu & Associates Certified Public Accountants/Tax Consultants #5 Dalsol St. GSIS Villages Brgy. Sangandaan, Project 8, Quezon City Attention: Mr. Anecito M. Yu Managing Partner Gentlemen : This refers to your undated letter, requesting in behalf of your client, Philippine Integrated (MFTRS) Exporters, Inc., a confirmation of your opinion that the sale by your client of its properties which are classified under its books as investment properties since they are not held primarily for sale to customers in the ordinary course of trade or business is subject to the 6% capital gains tax under Section 27 (D) (5) of the Tax Code of 1997 and that the same is not subject to the 12% value-added tax. It is represented that the Philippine Integrated (MFTRS) Exporters, Inc. ( "PIE Inc." for brevity), with Taxpayer Identification No. 000-057-898, is a corporation duly organized and existing under the laws of the Philippines with principal office address at 359 M. Vicente Street, Brgy. Malamig, Mandaluyong City, Metro Manila; that it is engaged in the general manufacturing, export and import business in goods, wares and merchandise of any kind and nature but not limited to textiles and garments; that in the course of its operation, it had acquired several investments in real properties, among them are the two (2) parcels of land together with improvements, both situated at M. Vicente St., Mandaluyong City, covered by TCT Nos. 4947 and 4948 of the Registry of Deeds of Mandaluyong City, consisting of 3,218 square meters and 3,667 square meters respectively; that during its operation, it erected particularly on TCT No. 4948 an office building and a warehouse for its business purposes; that some two years ago, PIE Inc. started to have its share in the global economic crises; that it was into serious financial distress such that it could no longer sustain economic viability to continue its business operation since year 2007; that it had not producer any income since then as shown by the submitted financial statements for the years 2006, 2007 and 2008; that recently, PIE started negotiating with prospective buyers for the sale of these properties as part of its initial step in the process of winding up its affairs as early as year 2007; and that a Certification was issued by the Office of the Barangay Captain of Barangay Malamig, Mandaluyong City on January 5, 2009 to the effect that PIE Inc. has no commercial operations since the year 2007; and that PIE Inc. has no more intention of reviving said business of which subject properties were its former office and factory sites. HcACTE In reply, please be informed that Section 27 (D) (5) of the Tax Code of 1997 provides that a final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of the corporation and 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 said Code, whichever is higher, of such lands and/or buildings. On the other hand, Section 3 (e) of Revenue Regulations (Rev. Regs.) No. 07-2003 provides the guidelines in determining whether a particular real property is a capital asset or ordinary asset. The regulations states that real properties formerly forming part of the stock in trade of a taxpayer engaged in the real estate business, or formerly being used in the trade or business of a taxpayer engaged or not engaged in the real estate business, which were later on abandoned and became idle, shall continue to be treated as ordinary assets. Real property initially acquired by a taxpayer engaged in real estate business shall not result in its conversion into a capital asset even if the same is subsequently abandoned or becomes idle. However, properties classified as ordinary assets for being used in business by a taxpayer engaged in the business other than real estate business as defined in Section 2 (g) hereof are automatically converted into capital assets upon showing of proof that the same have not been used in business for more than two (2) years prior to the consummation of the taxable transactions involving said properties. From the foregoing provisions, it is necessary to first determine the character of the real property being sold. Thus, if the real property is a parcel of land which is not actually used in business of the seller-corporation and is treated as a capital asset, as the term is defined under Section 39 (A) of the Tax Code of 1997, then a final tax of six percent (6%) shall be imposed on the gain presumed to have been realized on its sale, exchange or disposition based on the gross selling price or fair market value whichever is higher as determined in accordance with Section 6 (E) of the Tax Code of 1997. In the instant case, the proposed sale by PIE Inc. of the aforesaid parcels of land together with the improvements shall be treated as sale of capital assets subject to capital gains tax of 6% under Section 27 (D) (5) in relation to Section 39 (A) (1) of the Tax Code of 1997. (BIR Ruling No. DA-040-03 dated February 10, 2003; DA-009-03 dated January 14, 2003; 166-81 dated September 3, 1981; DA-217-99 dated April 12, 1999; DA-397-2000 dated November 20, 2000; DA-010-02 dated January 29, 2002; DA-009-2002 dated January 28, 2002.) PIE Inc. completely ceased its commercial operation since taxable year 2007 and it has no intention to revive its business, in which case, it follows that the land, office building and the warehouse were not used in business since then. By virtue of the provisions of Rev. Regs. 7-2003, PIE Inc. treated the subject properties as capital assets in its books of accounts since 2007, as the properties were automatically converted into capital assets, upon proof of their non-use for business purposes for at least two (2) years. That the subject properties were not held for speculative purposes by PIE Inc. and they did not form part of its inventory of supplies, materials and products either. EcTIDA Such being the case, the properties are properly classified as capital assets and their proposed sale is subject to capital gains tax at the rate of 6% based on the gross selling price or fair market value at the time of the sale, whichever is higher, pursuant to Sections 27 (D) (5) and 39 (A) (1) of the Tax Code of 1997. Moreover, it is subject to documentary stamp tax of 1.5% based on the consideration or value received or paid for the property, or on its market value whichever is higher, pursuant to Section 196 of the Tax Code of 1997. (BIR Ruling No. 459-88 dated September 19, 1988 & DA-049-2000 dated January 21, 2000). However, the proposed sale of PIE Inc. of its properties is not subject to the 12% value-added tax (VAT) imposed under Section 106 of the Tax Code of 1997, as amended, inasmuch as such properties are not held primarily for sale or lease to its customers in the ordinary course of trade or business. Although they were formerly used in business, their status as ordinary assets were automatically converted as capital assets in view of the provision of Rev. Regs. No. 7-2003 upon showing proof that they were not used in business for more than two (2) years prior to the consummation of the taxable transactions involving said properties. In the instant case, a Certification was issued by the Barangay Captain of Barangay Malamig, Mandaluyong City on January 5, 2009, certifying the fact that PIE Inc. has no commercial operation since year 2007. Consequently, the aforesaid properties are not used in business since then. 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.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group