Far East Asia Development Corporation

July 21, 2009 BIR RULING [DA-(C-135) 387-09] 39 (A) (1), RR 4-2007; DA (C-105) 323-2009; DA (C-052) 185-2009; DA (C-022) 104-2008; DA-163-2005; 234-92; 014-2003 Far East Asia Development Corporation Suite 602 Far East Asia Building 416 Marquina cor. Dasmarias Sts. Binondo, Manila Attention: Mr. Harris Javier T. Ngo President Gentlemen : This refers to your letter dated February 17, 2009, stating that Far East Asia Development Corporation (FEADC) is a corporation duly organized and existing under and by virtue of Philippine laws. In 1984, it acquired a parcel of land in Quezon City covered by Transfer Certificate of Title (TCT) No. 309361 which is classified as a residential property. Since the time of its purchase, the aforestated lot has never been used for any business purpose, neither has it ever been leased or rented to any person or business entity. The subject property remains to be, to this day, a vacant lot, undeveloped and unoccupied. FEADC has consistently and religiously paid its realty taxes without deriving any benefit therefrom. It is further represented that because such property was never used or occupied, neither was any improvement ever constructed thereon, it has, from the time of its purchase, always been treated as a capital asset. Likewise, the property did not at any time formed part of FEADC'S stock in trade, neither was it subjected to depreciation nor was it included in the inventory of FEADC. Such property was never held for speculative purposes and merely recorded as investment in FEADC's books. It is also your representation that because of financial constraints and concerns regarding liquidity, FEADC now contemplates on selling said asset to third persons. Based on the foregoing representations, you now request for confirmation of your position that the intended sale of the above-mentioned property is subject to the 6% final capital gains tax and is not subject to value-added tax (VAT). You also request for confirmation that the intended sale is subject to documentary stamp tax at 1.5% of the fair market value or the selling price of the property, whichever is higher. In reply, please be informed that Section 39 (A) (1) of the 1997 Tax Code, as amended, defines capital asset, to wit: "SEC. 39. Capital Gains and Losses. (A) Definitions. As used in this Title (1) Capital Assets . The term 'capital assets' 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 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." HEAcDC As stated above, capital assets do not include 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 real property used in trade or business of the taxpayer. Considering that since the time of acquisition, the subject property has never been developed or used by FEADC in the ordinary course of its business and has remained vacant, abandoned and idle, then the aforestated property is rightfully classified as capital assets. On the other hand, Section 27 (D) (5) of the Tax Code of 1997, as amended, provides, viz. : "SEC. 27. Rates of Income Tax on Domestic Corporations . (D) Rates of Tax on Certain Passive Incomes. xxx xxx xxx (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." This rule applies, whether or not the seller-corporation is engaged in the real estate business. In BIR Ruling No. DA-248-08 dated April 17, 2008, this Office held that "Since the above-mentioned properties were actually undeveloped and not leased to third parties nor held for sale or used in trade or business and are not subject to depreciation, the income to be derived from the expropriation of the above-mentioned properties, are not subject to the expanded withholding tax under Sec. 2.57.2 (J) of Revenue Regulations No. 2-98, as amended, 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 said Code, based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the Tax Code of 1996, whichever is higher." The above ruling was issued by this Office on the basis of the discussions stated in BIR Ruling No. DA-560-06 dated September 19, 2006 which states as follows "However, when the real estate involved has never formed part of its inventory for sale to customers and has not been used in its trade or business as evidenced by the fact that it has remained idle, raw and undeveloped, such real properties are properly classified as capital assets subject to a final tax of 6% on the gain presumed to have been realized from the sale or transfer thereof, pursuant to Sections 27(D)(5) of the Tax Code of 1997. aScITE xxx xxx xxx Lots or improvements, classified as "investment properties", which are idle, unproductive and unimproved since the time of its acquisition, and do not fall under any of the assets enumerated under Section 39(A)(1) of the Tax Code of 1997 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 10% VAT (BIR Ruling No. DA-152-04 dated March 31, 2004)." Furthermore, Sec. 14 (B) (p) (1) of Revenue Regulations (RR) No. 4-2007, amending Sec. 4.109-1 (B) (p) (1) of RR No. 16-2005, implementing Republic Act (R.A.) No. 9337 (Reform VAT Law), 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 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. Also in BIR Ruling No. DA-665-06, dated November 14, 2006, the BIR has ruled that sale of real properties of Benson Realty & Development Corporation, which are not primarily held for sale to customers in the ordinary course of trade or business nor included as part of its inventory of property for lease, is not subject to the 12% VAT. Likewise, in DA-685-06, dated November 30, 2006, it was reiterated 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. Finally, in BIR Ruling No. DA-420-05 dated October 10, 2005 (citing BIR Ruling DA-155-2005 dated April 14, 2005 and BIR Ruling DA 219-2005 dated May 5, 2005 among others), the BIR ruled that the subject realties of Union Ajinomoto Realty Corporation which have remained vacant, idle, unproductive and unimproved since the time of acquisition do not fall under any of the assets enumerated under Section 39 (A) (1) of the Tax Code of 1997 and Section 2 (b) of RR No. 7-2003 and are properly classified as capital assets; that the sale of the aforesaid properties which are classified as capital assets, is subject to capital gains tax at the rate of 6% on the gain presumed to have been realized from the sale or transfer; and that the sale of the said vacant and/or idle real properties, not being used in the ordinary course of the trade or business of UARC is not subject to the then 10% VAT. THIASE Accordingly, as the aforequoted property under consideration was not primarily held for sale or for lease to customers nor was it actually used in the ordinary course of FEADC's trade or business, neither was the subject property been part of the stock in trade of FEADC, nor was it subjected to depreciation and was never included in the latter's inventory, the proposed sale thereof is subject to the 6% final capital gains tax and to the 1.5% documentary stamp tax based on the gross selling price or fair market value of the property, whichever is higher, as determined in accordance with Sec. 6 (E) of the 1997 Tax Code, as amended. However, the sale is not subject to the 12% VAT pursuant to Sec. 14 (B) (p) (1) of RR 4-2007, implementing R.A. No. 9337. 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