JP Capanas Law Office

August 1, 2008 BIR RULING [DA-(C-020) 100-08] Sec. 27 (D) (5); RR 7-2003; DA-592-2006 dtd. 9/11/06 JP Capanas Law Office Cebu Grant Hotel Arcade, Capitol Site Escario St., Cebu City Attention: Jonathan P. Capanas CPA-Lawyer/Counsel Gentlemen : This refers to your letter dated July 1, 2008, in behalf of your client, SEGURA DEVELOPMENT CORP., requesting a confirmatory ruling on your opinion that the sales of Segura Development Corp. of its only real property which remained idle and undeveloped from its acquisition and had been consistently classified as an "investment property" in its books thereby considered as capital asset, is accordingly: (1) subject to the capital gains tax of 6% pursuant to Section 27 (D) (5) of the Tax Code of 1997; (2) subject to Documentary Stamp Tax at the rate of P15.00 for every P1,000.00 or fractional part thereof in excess of P1,000.00, or 1.5% of the consideration or fair market value of the properties, whichever is higher, pursuant to Section 196 of the Tax Code of 1997; and (3) exempt from 12% VAT, pursuant to Section 109 (w), supra , as amended by R.A. 9337, as implemented by Revenue Regulations No. 16-2005 (BIR Ruling No. DA 560-06 dated September 19, 2006). ICTHDE It is represented that SEGURA DEVELOPMENT CORP. (SDC for brevity), is a corporation duly organized and existing under the laws of the Philippines and is registered with the Securities and Exchange Commission on September 10, 1991, with principal office address at 90 Gen. Maxilom Ave., Cebu City; that since SDC's incorporation, it has no property that formed part of its inventory and is not leasing any property as such; that SDC did not undertake any development on any real property since it did not actually start commercial operation; that sometime in 2003, SDC acquired a vacant property located in Cebu City covered by TCT No. 180976; that said property is a vacant and/or idle land up to this date as evidenced by the Certificate of No Improvement issued by the City Assessor of Cebu as well as a certification issued by the Barangay Captain of the place where the property is located; that it is the only real property owned by SDC as can be gleaned from its Balance Sheet under the account title "Investment Properties"; that said property was never used by SDC in its trade or business since there was no commercial operation; that it is classified as a capital asset in its financial statement; that the property was never subjected to depreciation nor included in the stock in trade or inventory, nor held primarily for sale or lease to customers in the ordinary course of its trade or business, and it was never leased out since its acquisition; that now the corporation is contemplating a dissolution of its corporate existence. In reply, please be informed that under Section 27 (D) (5) of the Tax Code of 1997, as amended, a final tax of six percent (6%) is 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 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. On the other hand, under Sec. 39 (A) (1) of the 1997 Tax Code, as amended, the term "capital assets" 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 to customers in the ordinary course of his trade or business; or (iii) property used in the 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. Considering that SDC never commenced commercial operations since its incorporation and in fact, is now contemplating to cease its corporate existence, the subject real property registered under SDC's name, is properly treated as capital assets. The said real property classified as "investment property" which is idle, unproductive and unimproved since the time of acquisition, and does not fall under any of the assets enumerated under Section 39 (A) (1) of the Tax Code of 1997, as amended, and of Revenue Regulations No. 7-2003, are classified as capital assets (BIR Ruling DA-152-2004 dated March 31, 2004 cited in BIR Ruling No. DA-270-04 dated March 17, 2004). The sale by the SDC of said property in furtherance of SDC's liquidation, therefore, is subject to the 6% capital gains tax imposed under Section 27 (D) (5) of the Tax Code of 1997, as amended. HIaTDS Moreover, the sale of the above property of SDC treated as capital asset is not subject to the 12% value-added tax imposed under Section 106 of the Tax Code of 1997, as amended. However, it is subject to the 1.5% documentary stamp tax imposed under Section 196 of the same Code. 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