Shogun Management & Development Corporation

October 24, 2008 BIR RULING [DA-(C-109) 348-08] DA038-08 Shogun Management & Development Corporation M.J. Cuenco Avenue cor. Holyname Street Mabolo, Cebu City Attention: Ms. Geneveve Anne G. Co Chief Financial Officer Gentlemen : This refers to your letter dated June 16, 2008 stating that Shogun Management & Development Corporation (SMDC) is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) on June 16, 1988; that it is primarily organized "[T]o carry on a general merchandise and commercial business, including, the importing and exporting, buying and selling at retail or wholesale or both, of merchandise of all kinds and description generally handled by bazaar, department stores and supermarkets, such as but not limited to dry goods, wearing apparels, shoes, boots, slippers, bags, hats, toilet articles, hardware, construction and builders suppliers, electrical goods, supplies and appliances, glass wares, kitchen wares, cooking utensils, crockery, leather goods, toys, laces, embroideries, sporting goods, instruments, rubber, plastic and celluloid products, eyeglasses and other optical goods, office equipment, books, pamphlets, stationeries and supplies, beauty parlor equipment and accessories, cameras and photo supplies including developing and printing, religious articles, groceries, canteen and other, generally without limitations as to class or kind of products and merchandise." EDCTIa that the main business of SMDC is the operation of the Department Stores in Bacolod City, Davao City, Kabankalan, Negros Occidental and San Carlos City, Negros Oriental; that SMDC has acquired on various dates in 1997, 1998 and 2002, 14 parcels of sugar land located in Palampas, San Carlos City covered by TCT Nos. 14974, 14913, 14593, 15148, 14571, 14594, 14914, 14973, 15124, 15123, 15127, 15126, 15125 and 18917 with an aggregate area of 179,468 square meters; that the said lots are classified as investment property per Financial Statements as of June 30, 2006 and 2007 upon the company's adoption of Philippine Financial Reporting Standards (PFRS) and were never included in its inventories for sale, nor used in business since its acquisition; that SMDC has never sold or disposed of any real property since its incorporation 20 years ago; and that SMDC intends to sell the foregoing investment property to Tai-Pan Development, Inc. Based on the foregoing representations, you now request confirmation that the proposed sale of the above-mentioned real properties (capital assets) by SMDC to Tai-Pan Development, Inc. is subject to the 6% capital gains tax and documentary stamp tax but is exempt from the value-added tax (VAT). 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." 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. This is fortified in BIR Ruling No. 014-2003 dated October 28, 2003, where this Office ruled that cISAHT "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. 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) Considering that SMDC is not a real estate dealer, real estate developer, and/or real estate lessor and its primary purpose is to engage in general merchandise and commercial business, the several parcels of land to be sold by SMDC to Tai-Pan Development, Inc. are not stocks in trade or other real property of a kind which would properly be included in SMDC's inventory if on hand at the close of the taxable year. Nor are they real property held primarily for sale or lease to customers in the ordinary course of trade or business. (BIR Ruling Nos. DA163-05 dated April 14, 2005 and 014-03 dated October 28, 2003) In view of the foregoing, it is the considered opinion of this Office that the income to be derived by SMDC from the sale of the above-mentioned properties is not subject to the creditable withholding tax under Section 2.57.2 (J) of Revenue Regulations No. 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 parcels of land pursuant to Section 27 (D) (5) of the said Code. cAECST Moreover, under Section 109 (p) of the Tax Code of 1997, as amended by R.A. No. 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 SMDC is primarily engaged in the business of general merchandising and commercial business, the above-mentioned parcels of land are not being held by SMDC primarily for sale to customers or held for lease in the ordinary course of trade or business. The sale by SMDC of the said parcels of land shall be exempt from VAT. (BIR Ruling Nos. DA130-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 parcels of land 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), supra, whichever is higher. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service