Mardan Industrial Sales Corporation

July 6, 2009 BIR RULING [DA-(C-118) 353-09] 39 (A) (1), RR 4-2007; DA (C-105) 323-2009; DA (C-022) 104-2008; DA (C-052) 185-2009; DA-163-2005; 234-92; 014-2003 Mardan Industrial Sales Corporation 1180 P. Ocampo Sr. Ext. cor. Kakarong St. Makati City Attention: Mr. Cesar Dy President and CEO Gentlemen : This refers to your letter dated March 1, 2009 requesting in effect, for an opinion as to whether or not the transfer of several parcels of land by Mardan Industrial Sales Corporation (Mardan for brevity) is subject to capital gains tax or creditable withholding tax and value-added tax (VAT) as the said properties held for sale are considered its capital assets. It appears that Mardan (Tax Identification No. 000-130-759-000) is an entity duly organized and existing under Philippine laws and has been organized primarily for the purpose of engaging in the importation and distribution of various consumer and industrial products particularly toiletries, industrial machineries and parts, and occasionally, imported frozen poultry products. It is the registered and absolute owners of the following properties: 1) a lot located at Brgy. San Dionisio, Paraaque City covered by Transfer Certificate of Title (TCT) No. 103410; b) six (6) parcels of land contiguously attached and located at Don Bosco St., Better Living Subdivision, Brgy. Don Bosco, Las Pias City under TCT Nos. 104053, 104054, 104055, 104056, 104057 and 104058; and c) a lot located at Bgy. Magallanes, Makati City as evidenced by TCT No. 225121 which was acquired from Ayala Land, Inc. Mardan invested speculatively into said properties and had no intention of using them in the conduct of its business. Mardan's products are not likewise subject to depreciation and its inventory of products are stored not within any of the afore-mentioned properties, though they are kept in the warehouse within the premises of one of its affiliate companies. Mardan have no intention to purchase additional properties in the future nor does it intend to engage in the buying and selling of real properties to expand its current business. Trading of its goods will remain as the most important source of its business and the company's lone focus and will not further on maintain an inventory of real estate properties. In reply, please be informed that Section 39 (A) (1) of the Tax Code of 1997 defines a capital asset as: ITSacC ". . . 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." For a property to be considered as a capital asset, it must not be used, or is not being used in the business of the corporation. The real estate properties transferred by Mardan should be classified as capital assets considering that the latter is not engaged in the business of selling real estate. The provisions of Revenue Regulations (RR) No. 7-2003, particularly Sec. 3, par. a. enumerates the persons engaged in the real estate business as follows: "1. Real Estate Dealer All real properties acquired by the real estate dealer shall be considered as ordinary assets. 2. Real Estate Developer All real properties acquired by the real estate developer, whether developed or undeveloped as of the time of acquisition, and all real properties which are held by the real estate developer primarily for sale to customers in the ordinary course of his trade or business or which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year and all real properties used in the trade or business, whether in the form of land, building, or other improvements, shall be considered as ordinary assets. 3. Real Estate Lessor All real properties of the real estate lessor, whether land and/or improvements, which are for lease/rent or being offered for lease/rent, or otherwise for use or being used in the trade or business shall likewise be considered as ordinary assets." Mardan under its Articles of Incorporation is primarily engage in the importation and distribution of various consumer and industrial products. For the reason that Mardan is neither a real estate dealer, real estate developer nor a real estate lessor, Mardan can be regarded as a corporation not engaged in the sale of real estate assets to its customers because its organization and structure is designed and intended only for industrial business and as such the aforesaid properties conveyed should not be treated as an ordinary asset. The foregoing case of BIR Ruling 234-92 dated August 27, 1992, would find application in the case at hand, where this Office held that: ". . . since the land is not used in business by either of the owners but is being held as an investment by all the co-owners, the land is considered a capital asset." Furthermore, Section 14 (B) (p) (1) of RR No. 4-2007, amending Section 4.109-1 (B) (p) (1) of RR No. 16-2005, implementing Republic Act (RA) No. 9337 (Reform VAT Law), provides TAEcSC "(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. Applying the foregoing, it can be said that Mardan being engaged in the trading business cannot possibly be connected in the business of selling real estate, and therefore its real estate assets which do not form part of its trade or inventory and which was not subjected to depreciation should not be deemed an ordinary asset. Such being the case, this Office hereby confirms your opinion that: 1. All of the subject properties currently recorded as an investment in the books of Mardan are classified as capital assets; and 2. The sale of the properties is not held in the ordinary course of business and therefore, subject to 6% capital gains tax, documentary stamp tax on the transfer of real property but not subject to the 12% VAT. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service