Inyeco Development Corporation

July 6, 2009 BIR RULING [DA-(C-113) 343-09] 27 (D) (5); 39 (A) (1); 109; BIR Ruling 014-2003; DA-685-06 Inyeco Development Corporation 88 M.H. Del Pilar Street Tugatog, Malabon City Attention: Victor Luym President Gentlemen : This refers to your letter dated June 23, 2009 requesting for confirmation of your opinion as follows: 1. That the vacant and/or idle parcels of land covered by Transfer Certificates of Title (TCT) Nos. T-15676 and T-15677 of the Registry of Deeds of Tagaytay City which were acquired by Inyeco for investment purposes and which have remained vacant and idle since the time of their acquisition more than 24 years ago and which have never been developed or used by Inyeco in the ordinary course of its business nor held out or owned primarily by Inyeco for sale to customers in the ordinary course of its trade or business nor leased out to anybody are classified as capital assets in the hands of Inyeco; 2. The sale of the said vacant and/or idle real properties is subject to the 6% capital gains tax pursuant to Section 27 (D) (5) of the Tax Code of 1997 and to the documentary stamp tax at the rate of 1.5% of the consideration or fair market value of the property whichever is higher pursuant to Section 196 of the same Code; and 3. The sale of the said vacant and/or idle real properties, not being used in the ordinary course of the trade or business of Inyeco, is exempt from the 12% value-added tax. It is represented that Inyeco Development Corporation ("Inyeco") is a domestic corporation duly organized and existing under Philippine laws with TIN 000-908-003-000. It was registered with the Securities and Exchange Commission in 1963 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. The sole source of the income is from management services as reflected in its latest 2008 audited financial statements as well as in its 2007 and 2006 financial statements. In 1985, Inyeco acquired for investment purposes two contiguous parcels of land located in Silang Junction East of Tagaytay City covered by TCT Nos. T-15676 and T-15677 of the Registry of Deeds of Tagaytay City covering an area of 19,881 and 17,608 square meters, respectively. Since the time of their acquisition more than twenty-four (24) years ago, the said parcels of land have remained vacant and idle and never been developed or used by Inyeco in the ordinary course of its business as Inyeco has not introduced any improvement on said property as evidenced by the latest Tax Declaration on the said property and a certificate of no improvement issued by the City Assessors Office. Moreover Inyeco has never held the said properties for sale to customers in the ordinary course of its trade or business nor have said parcels of land been leased to anybody as they have always been treated by Inyeco as capital assets and have been classified as Investment Property in its financial statements. In reply, please be informed that Sec. 27 (D) (5) of the 1997 NIRC, as amended, provides that a final tax of six percent (6%) is imposed on the gains 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 Sec. 6 (E) of the said Code, whichever is higher, of such lands and/or buildings. The term "capital asset" is negatively defined in Section 39 (A) (1) of the Tax Code, as ". . . property held by the taxpayer (whether or not connected with his trade of business), but does not include stock in trade of the taxpayer or other property of 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 Sec. 34; or real property used in trade or business of the taxpayer." Thus, where the property has become idle and vacant, does not form part of the inventory of the taxpayer for sale or lease to customers, and not actually used in business, this Office has consistently ruled that the same shall be considered as capital asset and the gain presumed to have been realized from its sale will be subject to the capital gains tax when sold. (BIR Rulings DA-163-05 dated April 14, 2005, DA-040-03, DA-008-04 dated January 6, 2004, DA-152-04, DA-270-04 dated May 17, 2004, DA-155-05 dated April 14, 2005; DA-219-05 dated May 5, 2005) Notably, in BIR Ruling No. 014-2003 dated October 28, 2003, 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." (emphasis supplied) cTCEIS 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 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 Inyeco 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, it is deemed not engaged in the real estate business. Consequently, the vacant lands are not primarily held for sale or lease in the regular course of trade or business. In this regard, Section 4.09-1 (B) (1) (p) (1) of Revenue Regulations No. 16-2005 (Consolidated VAT Regulations), as amended, 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' (Black's 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 DA-685-06, dated November 30, 2006, the BIR has ruled that the sale of real properties of Union Ajinomoto Realty Corporation, not being used in the ordinary course of its trade or business, is not subject to the 12% VAT. If a realty corporation can be held exempt from VAT on the sale of its capital asset, with more reason can a holding company be held exempt too. The rationale is the absence of any tax benefit on the sales of these properties considering that there is no recoupment for VAT on the acquisition of capital assets and that there is no active pursuit of selling or leasing these assets which are primarily held for investment purposes. WHEREFORE, in view of the foregoing, this Office hereby confirms your opinion that the above-mentioned parcels of land, which do not fall under any of the assets enumerated in Section 39 (A) (1) of the Tax Code of 1997 in relation to Section 3 (e) of Revenue Regulations No. 7-2003, are considered as capital assets and the sale thereof, not being made in the regular course of trade or business, is subject to: 1. Capital gains tax of 6% pursuant to Section 27 (D) (5) of the NIRC of 1997; 2. Documentary stamp tax at the rate of P15.00 for each P1,000 or fractional part thereof in excess of P1,000, or 1.5% of the consideration or fair market value of the properties, whichever is higher, pursuant to Section 196, supra; 3. However, the sale is not subject to the 12% VAT pursuant to Section 4.109-1 (B) (1) (p) (1) of Revenue Regulations No. 16-2005, as amended, inasmuch as said properties are not held primarily for sale or lease to customers nor used in the ordinary course of Inyeco's primary trade or business. 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