Aranas Consunji Barleta

April 7, 2009 BIR RULING [DA-(C-052) 185-09] 27 (D) (5); 39 (A) (1); DA-155-2005 dtd. 04/14/2005; DA-290-06 dtd. 05/02/2006 Aranas Consunji Barleta Unit 106 G/F Le Metropole Building 326 Tordesillas cor. De la Costa Sts. Salcedo Village, Makati City Attention: Ma. Louella M. Aransas Partner Gentlemen : This refers to your letter dated February 16, 2009 requesting on behalf of your client, Prime Orion Philippines, Inc. ("POPI") for confirmation of your opinion as follows: 1. The Mandaue Land currently recorded as an investment in the books of POPI is classified as a capital asset and shall remain to be treated as a capital asset even after it has been subdivided; and 2. The Mandaue Land is not primarily held for sale or lease in the regular course of trade or business and therefore, is not subject to value added tax if conveyed or subdivided and shall remain as such even after it has been subdivided. HcaATE It is represented that POPI is a domestic corporation duly organized and existing under the laws of the Philippines with principal place of business at 20th Floor, LKG Tower, 6901 Ayala Avenue, Makati City. It was incorporated on May 19, 1989 as an investment holding company and as such has interests in real estate and property development, manufacturing and retailing/distribution, financial services and other allied services, organized under several intermediate holding companies. POPI owns a piece of land in Mandaue City, Cebu (the "Mandaue Land"). This property is recorded as an investment in its books and has never leased/rented nor used in the ordinary course of trade or business of POPI since its incorporation. It remains to be idle and has not been used by POPI. Based on a feasibility study which was undertaken quite recently, a proposal was made to the Board for the subdivision of the land to maximize its value. Anent the foregoing, you are of the position that the Mandaue Land is a capital asset and even after it is subdivided as it would still be undeveloped and will not be used in the normal trade or business of POPI, it shall still be classified as a capital inasmuch as the act of subdividing does not change the use, classification or characteristic of the property. In reply thereto, please be informed that 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. ECDaAc 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." The phrase "taxpayers engaged in the real estate business" refers collectively to real estate dealers, real estate developers, and/or real estate lessors. Conversely, the term "taxpayer not engaged in the real estate business" shall refer to persons other than 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 these Regulations. (Sec. 2 (g), Revenue Regulations No. 7-2003) Inasmuch as POPI is not primarily engaged in real estate business, but is merely a holding company and as such has interests in real estate and property development, manufacturing and retailing/distribution, financial services and other allied services, organized under several intermediate holding companies, it is deemed not engaged in the real estate business. Consequently, the Mandaue Land is property not primarily held for sale or lease in the regular course of trade or business. THAICD Section 14 (B) (p) (1) of Revenue Regulations No. 4-2007, amending Section 4.109-(B) (p) (1) of Revenue Regulations No. 16-2005, implementing Republic Act No. 9337 (Reformed 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. 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 (Blacks Law Dictionary, Sixth Edition). Thus to be held "primarily for sale or lease" the property must be held with the chief intention and active pursuit of being sold or leased. In BIR Ruling No. DA-C-022-104-08 dated August 4, 2008, the BIR in the case of Elysium Inc., ruled that "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 ELYSIUM, the sale thereof is exempt from the 12% value-added tax (VAT) pursuant to Section 14 (B) (p) (1) of Revenue Regulations No. 4-2007, implementing Republic Act No. 9337". Elysium Inc. was a holding company primarily organized to purchase, own or hold for investment or otherwise shares of stock, real and personal properties, bonds and other securities of any corporation or entity without engaging in stock brokerage. 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 POPI, any conveyance or subdivision of the Mandaue Land is exempt from the 12% value-added tax (VAT) pursuant to Section 14 (B) (p) (1) of Revenue Regulations No. 4-2007, implementing Republic Act No. 9337. Such being the case, this Office hereby confirms your opinion that: CHTAIc 1. The Mandaue Land currently recorded as investment in the books of POPI is classified as a capital asset and shall remain to be treated as a capital asset even after it has been subdivided; and 2. The Mandaue Land is not primarily held for sale or lease in the regular course of trade or business and therefore, is not subject to value added tax if conveyed or subdivided and shall remain as such even after it has been subdivided. 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.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group