Malayan Textile Mills Inc.

September 18, 2008 BIR RULING [DA-(C-071) 236-08] 27 (D) (5); 39 (A) (1); DA (C-022) 104-2008 Malayan Textile Mills Inc. Sta. Ana Drive, Sun Valley Subdivision Paraaque City Attention: Tan Ching President Gentlemen : This refers to your undated letter requesting for confirmation of your opinion that the sale of your company's real property which has long been idle and not used in business should be classified as a capital asset and, therefore, subject to the 6% capital gains tax and 1.5% documentary stamp tax but exempt from the 12% value-added tax. It is represented that Malayan Textile Mills, Inc. is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) under SEC Registration No. 71209 dated December 14, 1976; that its primary activity is to engage in the manufacture/spinning/weaving of cotton and other synthetic fiber; that Malayan Textile Mills, Inc. is the registered owner of parcels of land located at Bo. Banay, Banay Cabuyao, Laguna covered by Transfer Certificate of Title (TCT) No. 54010 containing an area of 66,799 square meters and TCT No. 158706 containing an area of 479 square meters both issued by the Register of Deeds of Laguna; that these lots had never been used in any business activity and remained vacant and idle from the time it was purchased, except for shanties occupied by some squatters which were later removed in 2005 by virtue of a writ of execution filed in court; that Malayan Textile Mills, Inc. has never been engaged in any real property business; and that Malayan Textile Mills, Inc. has always treated the said properties as capital asset. 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." ScHADI 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. ECaAHS 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) HSEIAT Inasmuch as Malayan Textile Mills, Inc. is not primarily engaged in real estate business, but is merely a textile company organized to engage in the manufacture/spinning/weaving of cotton and synthetic fiber, it is deemed not engaged in the real estate business. Consequently, the sale of said real property is not subject to the expanded withholding tax under Revenue Regulations No. 2-98, as amended, but only to the 6% capital gains tax (CGT) imposed under Section 27 (D) (5) of the 1997 Tax Code, as amended, and also subject to documentary stamp tax (DST) at the rate of P15.00 for each 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 same Code. 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 ADHcTE "(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' (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. 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 Malayan Textile Mills, Inc. 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. Such being the case, this Office hereby confirms your opinion that the sale of the above-mentioned property which has long remained idle and considered as capital asset, is: (1) subject to the capital gains tax of 6% pursuant to Section 27 (D) (5) of the Tax Code of 1997, as amended; (2) subject to DST at the rate of P15.00 for each 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, as amended; and (3) exempt from 12% VAT, the property not being primarily held and offered for sale or lease to customers in the ordinary course of Malayan Textile Mills, Inc. trade or business, as provided under Section 109 (P) of the Tax Code of 1997, as amended. (BIR Ruling No. DA-270-04 dated May 17, 2004) HCIaDT 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service