Manecor Investment Corporation

January 23, 2009 BIR RULING [DA-(C-010) 039-09] 27 (D) (5); 39 (A) (1); DA(C-171)530-2008 dtd. 12/15/08 Manecor Investment Corporation 136 Ecology Village, Don Bosco Makati City Attention: Jose Ramon Revilla President Gentlemen : This refers to your letter dated January 12, 2009 requesting for a ruling on the tax consequences of the sale of your property covered by Transfer Certificate of Title (TCT) No. 387395 located at 835 Cypress Street, Dasmarias Village, Makati City. It is represented that Manecor Investment Corporation ("MANECOR" for brevity) is a domestic corporation duly registered with the Securities and Exchange Commission under S.E.C. Registration No. 48408 primarily engaged in investment activities; that its primary purpose is to conduct researches, investigations and examinations of businesses and enterprises of every kind and description throughout the world with the aim of securing information and particulars for the investment and employment of capital; that it is the registered owner of a parcel of land in 835 Cypress Street, Dasmarias Village, Makati City covered by TCT No. 387395 issued by the Registry of Deeds for the Province of Rizal containing an area of 1,012 square meters; that the said property has not been used by MANECOR in its trade or business, nor held primarily for sale or lease to customers in the ordinary course of its trade or business; that MANECOR has not derived any income from the said property; that MANECOR now intends to sell the said realty to the general market due to lack of interest of the corporation in maintaining the said property; and that based on the foregoing, you are requesting for a ruling whether or not the sale of the Dasmarias Village, Makati City property of MANECOR should be classified as a capital asset and will be subjected to a 6% capital gains tax and 1.5% documentary stamp tax but exempt from the 12% value-added tax (VAT). In reply thereto, please be informed that Section 27 (D) (5) of the Tax Code of 1997, as amended, as implemented by Revenue Regulations No. 7-2003, provides "(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. 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 a 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 this Code, whichever is higher, of such lands and/or buildings." The character of the real property involved in the transaction must primarily be determined, i.e., whether or not it is capital or ordinary asset, prior to the application of the appropriate tax rates. Under Section 39 (A) (1) of the 1997 Tax Code, the term "capital asset" is negatively defined as property held by the taxpayer (whether or not connected with his trade or business), but does not include (i) stock in trade of the taxpayer or other 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 (ii) property held by the taxpayer primarily for sale or lease to customers in the ordinary course of trade or business; or (iii) property used in trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or (iv) real property used in trade or business of the taxpayer. (BIR Ruling No. 27-02 dated July 3, 2002) DHESca It is undisputed that the yardstick for determining whether the property is capital asset or ordinary asset is the actual use of the said property. Thus, if the property is not actually used in trade or business of the taxpayer, whether or not connected with his trade or business, or not held for lease or sale to customers, it will be classified as a capital asset. Moreover, if the property is merely held for investment purposes and remains vacant and idle, it is deemed a capital asset. This is fortified in BIR Ruling No. 014-2003 dated October 28, 2003, where this Office ruled that "It is apparent under the foregoing provision that for a property to be considered an ordinary asset it must be actually used in the business of the corporation. Accordingly, on the condition that Wendell Holdings Co., Inc. is not habitually engaged in the real estate business as represented, the property under consideration is a capital asset. The property was neither held primarily for sale to customers nor actually used in the business of Wendell Holdings Co., Inc. . . . The property is not actually used in the business of Wendell Holdings Co., Inc. as it has remained idle and undeveloped. Therefore, the sale of the property under consideration is a sale of a capital asset, not an ordinary asset. As such, the transaction is subject to capital gains tax of 6% under Section 27(D)(5) and not to the creditable withholding tax." Based on your representations that the subject real property registered under MANECOR's name, classified as "investment property" in its books, had not been used in business since inception and was never leased out nor held it out for sale in the ordinary course of trade or business, nor included as part of its inventories nor did it derive any income at all therefrom, the above subject property is properly treated and classified as a capital asset. The sale of the said property, therefore, is subject to the 6% capital gains tax imposed under Section 27 (D) (5) of the 1997 Tax Code and to the documentary stamp tax of 1.5% imposed under Section 196 of the same Code, based on the gross selling price or fair market value as determined in accordance with Section 6 (E) of the 1997 Tax Code, whichever is higher. Corollary thereto, Section 14 (B) (p) (1) of Revenue Regulations No. 4-2007, amending Section 4.109-1 (B) (p) (1) of Revenue Regulations No. 16-2005, implementing Republic Act No. 9337 (Reform VAT Law), provides "(p) The following sales of real properties are exempt from VAT, namely: (1) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business. DEHcTI However, even if the real property is not primarily held for sale to customers or held for lease in the ordinary course of trade or business but the same is used in the trade or business of the seller, the sale thereof shall be subject to VAT being a transaction incidental to the taxpayer's main business." The term "primary" is defined as 'first, principal, chief, leading or first in order of time, or development, or intention' (Black's Law Dictionary, Sixth Edition). Thus, to be 'held primarily for sale or lease', the property must be held with the chief intention of being sold or leased. In VAT Ruling No. 012-02, it was held that the sale of properties of MGM Motor Trading, Inc. is not subject to VAT since the properties sold were neither primarily held for sale to customers nor for lease in the ordinary course of its trade or business. Also in BIR Ruling No. DA-665-06, dated November 14, 2006, the BIR has ruled that sale of real properties of Benson Realty & Development Corporation, which are not primarily held for sale to customers in the ordinary course of trade or business nor included as part of its inventory of property for lease, is not subject to the 12% VAT. Likewise, in DA-685-06, dated November 30, 2006, it was reiterated that the sale of real properties of Union Ajinomoto Realty Corporation, not being used in the ordinary course of its trade or business, is not subject to the 12% value-added tax. Accordingly, as the property under consideration was neither primarily held for sale or for lease to customers nor actually used in the ordinary course of trade or business of MANECOR, the sale of the above-mentioned property is exempt from the 12% value-added tax (VAT) pursuant to Section 109 (P) of the Tax Code of 1997, as amended by Republic Act No. 9337, and implemented by Revenue Regulations No. 16-2005. This serves as an authority for the concerned Revenue District Officer to immediately issue the Certificate Authorizing Registration in favor of the buyer to effect the transfer of the title of the property in the latter's favor. EHSTDA This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, however, it is 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