G.E. Antonino, Incorporated

September 26, 2008 BIR RULING [DA-(C-081) 259-08] 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 letters dated July 31 and September 18, 2008 further 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 creditable withholding tax and 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 rented out from the year 1989 until 2004 and since then, it was never leased out nor used by the company in its trade or business. Thus, the Property became vacant and idle from 2004 up to the present. The Property was not 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, starting from 2004 up to the present. SIcEHD 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, in applying the provisions of Revenue Regulations (RR) No. 7-2003, particularly Section 3 (e) thereof, which provides to wit: "SEC. 3. Guidelines in Determining Whether a Particular Real Property is a Capital Asset or Ordinary Asset . xxx xxx xxx e. Treatment of abandoned and idle real properties. xxx xxx xxx. Provided however, that properties classified as ordinary assets for being used in business by a taxpayer engaged in business other than real estate business as defined in Section 2 (g) hereof are automatically converted into capital assets upon showing of proof that the same have not been used for more than two (2) years prior to the consummation of the taxable transactions involving said properties." (Emphasis supplied.) real properties owned by taxpayers not engaged in the real estate business or referring to those persons other than real estate dealers, real estate developers and/or real estate lessors, and those taxpayers deemed to be engaged in the real estate business 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, upon showing of proof that the same have not been used in business for more than two (2) years prior to the consummation of the taxable transactions involving the said real properties, and though classified as ordinary assets, be automatically converted into capital assets. DTIcSH Considering that G.E. Antonino, Incorporated is a taxpayer not engaged in the real estate business, not being a real estate dealer, real estate developer, and/or real estate lessor and whose primary purpose is to locate, acquire, buy, own, lease, sub-lease, mortgage, exchange, develop, operate and exploit forests and timber lands of all kinds; and that the aforementioned Property had already been idle and vacant in 2004 and since then had not been used in the ordinary course of trade or business; 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, it is the considered opinion of this Office that the income derived from the sale thereof is not subject to the creditable/expanded withholding tax under Sec. 2.57.2 (J) of RR No. 2-98, as amended, but to the capital gains tax of six percent (6%) based on the gross selling price or current 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. (BIR Ruling Nos. DA-163-05 dated April 14, 2005 and 014-03 dated October 28, 2003). ASHEca 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 and the Property is a capital asset of the company prior to the consummation of the sale, 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). Furthermore, 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. Finally, this ruling supercedes BIR Ruling No. DA(C-029) 118-2008 dated August 7, 2008. 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