G.E. Antonino, Incorporated

August 7, 2008 BIR RULING [DA-(C-029) 118-08] 27 (D) (5); 39 (A) (1); 109 (p); RR 7-2003; DA-301-2004 G.E. Antonino, Incorporated 15th Floor, G.E. Antonino Building, T.M. Kalaw cor. J. Bocobo Streets Ermita, Manila Attention: Ms. Ma. Fenora Pigon-Runes Vice President-Finance Gentlemen : This refers to your letter dated July 31, 2008 requesting for confirmation of your opinion that the sale of your parcel of land is subject to the 6% capital gains tax ("CGT") and therefore exempt from the 12% value-added tax ("VAT"). Based on your representations, as well as from the documents submitted, the facts are as follows: G.E. Antonino, Incorporated is a domestic corporation with principal office in Ermita, Manila. Under its Articles of Incorporation, its primary purpose is "To locate, acquire, buy, own, lease, sub-lease, mortgage, exchange, develop, operate and exploit forests and timber lands of all kinds, water and water rights, sawmill sites, and other lands in connection therewith and to engage in, transact and carry on, in all its various branches and detail, the business of acquiring, cutting, owning, buying, selling, leasing, sub-leasing, mortgaging, pledging, exchanging, manufacturing, milling, distributing, shipping, transporting, hauling, marketing, exporting timber, lumber, wood, logs, and the products and by-products thereof". G.E. Antonino, Incorporated is the registered owner of a parcel of land and improvement ("Property") situated at 2299 Chino Roces Avenue Extension, Barangay Magallanes, Makati City. This parcel of land is covered by Transfer Certificate of Title ("TCT") No. 280172, issued by the Registry of Deeds for the Province of Rizal, with a total area of 5,457 square meters. The said Property was never used by G.E. Antonino, Incorporated in its trade or business, nor subjected to depreciation, nor included in its stock in trade or inventory, nor held primarily for sale or lease to customers in the ordinary course of its business and has been a non-performing asset for the past four (4) years. In reply, please be informed that the term "capital asset" as negatively defined in Section 39 (A) (1) of the 1997 Tax Code, as amended, means property held by the taxpayer (whether or not connected with his trade or business), but does not include 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 property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or 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 real property used in trade or business of the taxpayer. Furthermore, Section 3 (4) of Revenue Regulations (RR) No. 7-2003 provides that all real properties acquired in the course of trade or business by a taxpayer habitually engaged in the sale of real estate shall be considered as ordinary assets. As defined under Section 2 (g) of RR 7-2003, taxpayers engaged in the real estate business shall refer collectively to real estate dealers, real estate developers, and/or real estate lessors. A taxpayer whose primary purpose of engaging in business or whose Articles of Incorporation states that its primary purpose is to engage in the real estate business shall be deemed to be engaged in the real estate business for purposes of the regulations. TCacIE Considering that G.E. Antonino, Incorporated is not a real estate dealer, real estate developer, and/or real estate lessor and its primary purpose is to locate, acquire, buy, own, lease, sub-lease, mortgage, exchange, develop, operate and exploit forests and timber lands of all kinds, the aforesaid Property is not stock in trade or other real property of a kind which would properly be included in G.E. Antonino, Incorporated's inventory if on hand at the close of the taxable year. Nor is it real property held primarily for sale or lease to customers in the ordinary course of trade or business. (BIR Ruling Nos. DA-163-05 dated April 14, 2005 and 014-03 dated October 28, 2003) . Furthermore, in BIR Ruling No. 014-2003, dated October 28, 2003, it was ruled that for a property to be considered an ordinary asset, it must be actually used in the business of the corporation. The BIR stated that on the condition that the taxpayer concerned was not habitually engaged in the real estate business, the property not actually used in the business of the taxpayer, the same having remained idle and vacant, was considered a capital asset. In view of the foregoing, it is the considered opinion of this Office that the income derived by G.E. Antonino, Incorporated from the sale of the above-mentioned Property is not subject to the creditable/expanded withholding tax under Section 2.57.2 (J) of RR 2-98, as amended, but to the capital gains tax of six percent (6%) based on the gross selling price or fair market value as determined in accordance with Section 6 (E) of the Tax Code of 1997, as amended by Republic Act (R.A.) No. 9337, whichever is higher, of such Property pursuant to Section 27 (D) (5) of the same Code. Moreover, under Section 109 (p) of the Tax Code, as amended by R.A. 9337, the sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business shall be exempt from VAT. Considering that G.E. Antonino, Incorporated is primarily engaged in acquiring, buying, operating and exploiting forests and timber lands of all kinds, the above-mentioned Property is not being held by G.E. Antonino, Incorporated primarily for sale to customers or held for lease in the ordinary course of trade or business. Hence, the sale by G.E. Antonino, Incorporated of the said Property shall be exempt from VAT. (BIR Ruling Nos. DA-130-A-2003 dated April 25, 2003 and VAT Ruling No. 034-2001 dated June 13, 2001) . Finally, the Deed of Sale conveying the above-mentioned Property shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6 (E) of the same Code, whichever is higher. This ruling shall serve as the authority for the Revenue District Officer concerned to issue the corresponding Certificate Authorizing Registration and tax clearance certificate for the transfer of the title covering the parcel of land in the name of the buyer. IHCSET 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