Lor Calma Design Associates, Inc.

July 6, 2009 BIR RULING [DA-(C-114) 345-09] 27 (D) (5); DA-578-2007; DA-290-2006 Lor Calma Design Associates, Inc. G/F State Condo 1, 186 Salcedo Street Legaspi Village, Makati City Attention: Mr. Lorenzo L. Calma President Gentlemen : This refers to your letter dated May 28, 2009 requesting for a confirmation of your opinion that the sale by Lor Calma Design Associates, Inc. of its property held as investment is subject to the 6% capital gains tax and 1.5% documentary stamp tax but exempt from the 12% value added tax under the Tax Code of 1997, as amended. It is represented that Lor Calma Design Associates, Inc. is a corporation duly organized and existing under the laws of the Philippines with Securities and Exchange Commission (SEC) Registration No. 62523; that it is primarily engaged in manufacturing, buying and selling of furniture, office and store fixtures, devices, partitions, improvements, and other articles of wood or metal, or both, and to engage in the installation, alteration and repair thereof; to manufacture and sell chairs, furniture and seats, backs and arms for chairs, sofas, dettes and benches, and also cushions and cushioned seats, back and arms for the same, and also for decorative and other purposes, and to manufacture, buy, sell and generally deal in furnishings of all kinds and descriptions; that on May 2009, the Board of Directors and stockholders approved and ratified respectively, a resolution to sell the corporation's real property held as investment, consisting of a residential house and lot located at No. 5 Ipil Place, Brgy. South Forbes, Makati City; and that the said property is not used in trade or business of the Corporation, nor the same been leased nor rented out. In reply, 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, or 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, 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 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 Lor Calma Design Associates, Inc. is not primarily engaged in real estate business but is engaged primarily in manufacturing, buying and selling of furniture, office and store fixtures, devices, partitions, improvements, and other articles of wood or metal, or both, it is deemed not engaged in the real estate business. Consequently, the sale of the aforesaid property is deemed a sale of capital asset subject to the 6% final capital gains tax but not subject to the 12% VAT. Moreover, real property, which is idle and vacant and had not been used in the ordinary course of trade or business nor had it ever been classified as property of a kind which would properly be included in the inventory if on hand at the close of the taxable year, nor had it ever been held by the taxpayer primarily for sale to customers in the ordinary course of trade or business, the income derived from the sale thereof is not subject to the expanded withholding tax under Section 2.57.2 (J) of Revenue Regulations No. 2-98, but only to the 6% capital gains tax imposed under Section 27 (D) (5) of the Tax Code of 1997 and to the documentary stamp tax under Section 196 of the same Code, based on the gross selling price or fair market value (FMV) as determined in accordance with Section 6 (E) of the Code, whichever is higher Lots or improvements, classified as "investment properties", which are idle, unproductive and unimproved since the time of acquisition, and do not fall under any of the assets enumerated under Section 39 (A) (1) of the Tax Code of 1997, as amended, and 2 (b) of Revenue Regulations No. 7-2003 are classified as capital assets, the sale of which is subject to 6% capital gains tax, DST of 1.5% but exempt from 12% VAT (BIR Ruling No. DA-152-04 dated March 31, 2004). Accordingly, we hereby confirm 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 Lor Calma Design Associates, Inc.'s trade or business, as provided under Section 109 (w) of the Tax Code of 1997, as amended. (BIR Ruling No. DA-270-04 dated May 17, 2004.) 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service