Unit 106, Ground Floor

November 27, 2008 BIR RULING [DA-(C-144) 466-08] 27 (D) (5); RR7-2003; 196; DA 219-05; DA 201-06 Unit 106, Ground Floor Metropole Building 236 Tordesillas corner dela Costa Street Salcedo Village, Makati City Attention: Atty. Andrew James Gerard D. Ruiz Tax Counsel Gentlemen : This refers to your letter dated November 20, 2008, requesting, on behalf of your client, Northwest Tourism Corporation, confirmation of the tax consequences arising from its sale of particular real properties. AIDSTE It is represented that Northwest Tourism Corporation ("NORTHWEST" for brevity) is a corporation duly organized and existing under the laws of the Republic of the Philippines, engaged in the business of tourism; that NORTHWEST engages in setting up travel tours and packages, and sets up accommodations for its customers; that NORTHWEST is neither a real estate dealer, nor real estate developer, nor a real estate lessor; that NORTHWEST is the owner of several real properties, particularly covered under Transfer Certificate of Titles (TCT) Nos. 14101 and 14102 (with improvements),consisting of 20,252 sq. m. and 30,378 sq. m. respectively, located in Barrio San Miguel, Puerto Princesa City, Province of Palawan; that sometime in 2001, NORTHWEST experienced serious financial difficulties and labor issues, resulting in the complete and absolute cessation of its any operations involving the said real properties; that from 2001 to the present, the aforementioned real properties have remained idle and unused, not subject to any kind of sale of service involving said properties, and are not subject to any fruitful or income generating use by NORTHWEST; that on November 14, 2008, NORTHWEST executed a Deed of Absolute Sale covering the said real properties. Based on the foregoing, you are requesting confirmation of your opinion, that: 1. the real properties sold by NORTHWEST are classified as capital assets, and are thus subject to the CGT at a rate of 6% of the gross selling price or fair market value of said real properties, as provided under Section 27 (D) (5) of the Tax Code of 1997 (Tax Code),as amended; 2. as the aforementioned sale involves capital assets, the said sale is not subject to the VAT, further considering that the sale is not done in the ordinary course of trade or business, as stated in Section 105 of the Tax Code, as amended; 3. the said sale of real properties shall be subject to the DST at the rate of P15.00 for every P1,000.00 of the consideration contracted to be paid for such realty or on its fair market value, whichever is higher, as provided under Section 196 of the Tax Code, as amended. In reply, please be informed that Sec. 27 (D) (5) of the Tax Code, 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. IaESCH The term "capital asset" is negatively defined in Section 39 (A) (1) of the Tax Code, as amended, 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 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 Sec. 34; or real property used in trade or business of the taxpayer". Thus, where the property has remained undeveloped, idle and vacant, does not form part of the inventory of the taxpayer for sale or lease to customers, not actually used in business, and is aptly recorded as investment property in the corporate books, 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 CGT 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) EAICTS It is noted, however, that under Revenue Regulations (RR) No. 07-03, all real properties acquired by a taxpayer that is habitually engaged in the real estate business shall be considered ordinary assets. Sec. 2, pars. (d), (e) and (f) of RR No. 7-2003, defines the persons engaged in the real estate business, as follows: "d. Real estate dealer shall refer to any person engaged in the business of buying and selling or exchanging real properties on his own account as a principal and holding himself out as a full or part-time dealer in real estate. "e. Real estate developer shall refer to any person engaged in the business of developing real properties into subdivisions, or building houses on subdivided lots, or constructing residential or commercial units, townhouses and other similar units for his own account and offering them for sale or lease. "f. Real estate lessor shall refer to any person engaged in the business of leasing or renting real properties on his own account as a principal and holding himself out as lessor of real properties being rented out or offered for rent." Based on the above definitions, NORTHWEST is a company not habitually engaged in the real estate business. It is primarily organized to function as a tourism company. Moreover, as you mentioned, the subject property has, from 2001, remained idle, and has not been held for sale or for lease to customers in the ordinary course of trade or business. In BIR Ruling DA-201-06 dated April 3, 2006, citing BIR Ruling Nos. DA-163-05 dated April 14, 2005 and 014-03 dated October 28, 2003, the BIR held thus: "...Considering that RS is not real estate dealer, real estate developer, and/or real estate lessor and its primary purpose is to carry on its agricultural business, the parcels of land to be sold by RS are not stock in trade or other real property of a kind which would properly be included in RS' inventory if on hand at the close of the taxable year. Nor are they real property held primarily for sale or lease to customers in the ordinary course of trade or business." Sec. 3 (e) of RR No. 7-2003, provides for a reclassification of ordinary assets to capital assets, in cases of companies who are not habitually engaged in the real estate business, as follows: "Provided however, that properties classified as ordinary assets for being used in business by a taxpayer engaged in business other than real estate business as defined in Section 2 (g) hereof are automatically converted into capital assets upon showing of proof that the same have not been used for more than two (2) years prior to the consummation of the taxable transactions involving said properties." Considering that NORTHWEST is not engaged in the real estate business, particularly in the purchase and sale of real estate properties, for subsequent re-sale, either for its account or the account of others, or in the development of residential subdivisions, condominium units and the like for purposes of selling the end developed units to third parties, and further considering that the said real properties have remained idle for more than two (2) years, due to the financial difficulties and labor disputes, this Office confirms your opinion that the real properties of NORTHWEST, particularly the said real properties covered by TCT Nos. 14101 and 14102 (with improvements), consisting of 20,252, sq. m. and 30,378 sq. m. respectively, located in Barrio San Miguel, Puerto Princesa City, Province of Palawan, are capital assets. As such, the sale of said real properties is subject to the Capital Gains Tax (CGT) as imposed under Section 27 (D) (5) of the Tax Code, as amended, and is not subject to the expanded withholding tax under RR No. 2-98, as amended. EAISDH Moreover, under Sec. 109 (p) of the Tax Code, as amended, the sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business shall be exempt from VAT. (BIR Ruling DA-201-06 dated April 3, 2006, DA-270-04 dated May 17, 2004, DA-008-04 dated January 6, 2004) Given your representation that the property is neither held by NORTHWEST primarily for sale to customers nor for lease, the sale of said property shall not be subject to VAT. Finally, the Deed of Absolute Sale executed by NORTHWEST conveying the above-mentioned property shall be subject to the Documentary Stamp Tax imposed under Section 196 of the Tax Code, as amended, based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6 (E) of the same Code, whichever is higher. This ruling authorizes the Revenue District Officer of the revenue district where the property is located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the transfer of the titles to the lots to be received by the buyer upon presentation of proof of payment of the Capital Gains Tax and Documentary Stamp Tax. 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service