Corporate Counsels, Philippines

November 7, 2008 BIR RULING [DA-(C-123) 400-08] Sec. 27 (D) (5); 39 (A); RR 7-2003; DA-692-06; DA-420-05; DA-155-05; DA-660-99 Corporate Counsels, Philippines Unit 3104, 31/F, Antel Global Corporate Center No. 3 Doa Julia Vargas Avenue, Ortigas Center Pasig City Attention: Attys. Arthur R. Ponsaran & Maria Soledad C. San Pablo Gentlemen : This refers to your letter dated September 3, 2008 requesting confirmation of the tax consequence of the sale by Industrial-Commercial Holdings, Inc. ("ICHI" for brevity) of its idle land. The facts as represented are as follows: ICHI was originally incorporated in 1994 as a holding company. On March 3, 1998, it amended its primary purpose to include investment, acquisition, holding, disposing, developing, leasing and managing all kinds of properties of whatever nature and purpose. Sometime in 1997, it has acquired certain real estate properties to be developed into factory sites for the manufacturing of industrial and plastic chemicals in accordance with its secondary purpose, to wit: "To engage in, operate, conduct and maintain the business of manufacturing, importing, exporting, buying, selling or otherwise dealing in, at wholesale and retail, such goods as industrial chemicals, plastic, building materials, equipment and supplies and other finished goods of any kind whatsoever, and any and all equipment, materials, supplies used or employed in or related to the manufacture of such finished goods." The above acquired real properties were booked as part of the corporation's capital assets. However, the development of the said properties did not materialize due to capital deficiency to finance the intended venture and to pay-off its existing debts. Hence, on September 28, 1999, its management decided to dispose of some of the corporation's real properties to generate funds to which BIR Ruling No. 660-99 dated November 29, 1999 was secured declaring the properties as capital assets of the corporation and the sale thereof as subject to the final tax of 6% as determined in accordance with Section 6 (E) of the Tax Code of 1997. DHITCc As in the case of the properties in the first transfer subject of BIR Ruling No. 660-99, supra, the property covered by Transfer Certificate of Title (TCT) No. T-334020 issued by the Register of Deeds of Calamba, sought to be disposed and subject of this request is likewise held in the books of ICHI as part of its capital assets, being originally intended for the construction of a factory site, but has not been used in trade or business of the corporation and has become idle and vacant since its acquisition in 1997. From the foregoing, it is your view that the sale by GMC of its idle land, classified as capital asset, is subject to the 6% capital gains tax and the 1.5% documentary stamp tax only. In reply thereto, please be informed that the term "capital assets" as negatively defined in Section 39 (A) (1) of the Tax Code of 1997, 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 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 allowances for depreciation provided in Subsection (F) of Section 34, or real property used in trade or business of the taxpayer. In view of the foregoing, and inasmuch as the aforementioned parcel of land of ICHI is not used in its business and is booked as part of its capital assets; and that it lies idle since the time of its acquisition, the said realty, accordingly, is properly considered as a capital asset. Consequently, the sale of said parcel of land is subject to the 6% capital gains tax under Section 27 (D) (5) of the Tax Code of 1997, as amended. Likewise, the said sale is subject to the documentary stamp tax imposed under Section 196 of the same Tax Code. (BIR Ruling No. DA-397-2000 dated November 20, 2000 citing UN-276-95 dated July 26, 1995; Rev. Regs. No. 7-2003) Moreover, the sale of the above property by ICHI, treated as its capital asset, is not subject to the 12% value-added tax imposed under Section 106 of the 1997 Tax Code, as amended, in accordance with Sec. 4.109-1 (B) (p) of Revenue Regulations No. 16-2005, implementing Republic Act No. 9337. (BIR Ruling No. DA-219-2005 dated May 5, 2005 cited in BIR Ruling Nos. DA-653 & 654-2006, both dated November 7, 2006) 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. ESHAIC Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service