Alba Romeo & Co.

July 27, 2009 BIR RULING [DA-(C-151) 412-09] Section 27 (D) (5); DA-219-05 Alba Romeo & Co. Ayala Avenue Makati City Attention: Mr. Alba Romeo This refers to your request for ruling that the sale of your client, MASAITO DEVELOPMENT CORPORATION (MASAITO), of its real property held as investment is subject to a final tax of 6% and documentary stamp tax of 1.5% but exempt from 12% Value Added Tax (VAT). It is represented that MASAITO is primarily engaged in real estate development more particularly horizontal residential development. The property which is subject of this request for ruling has an area of 17,014.64 square meters or roughly 1.7 hectares under Transfer Certificate of Title (TCT) No. 167372 issued by the Registry of Deeds for the city of Paraaque. In view of the small area of the land it is not ideal for horizontal development, not even for vertical development. Thus, the property has remained idle, unimproved and unproductive from the time of acquisition. Neither was it subjected to depreciation, nor included in its stock in trade or inventory, nor held for sale or lease to its customers in the ordinary course of trade or business. In fact, the property has been classified in MASAITO's latest Audited Financial Statement as "Investment Property" for investment purposes. In reply, please be informed that pursuant to Section 27 (A) of the Tax Code of 1997, whenever a corporate-real estate developer sells real properties forming part of its inventory or those primarily held for sale to customers, it is considered as a sale of ordinary assets subject to the 32% income tax. However, when the real estate involved is idle, raw, undeveloped, has never formed part of the real estate developer's inventory for sale to customers and has not been used in its trade or business, 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 pursuant to Section 27 (D) (5) of the Tax Code of 1997. Thus, if the real property is a land or building which is not actually used in the business of the seller-corporation and is treated as a capital asset, as that term is defined in Section 39 (A) (1) of the Tax Code of 1997, then a final tax of six percent (6%) shall be imposed on the gain presumed to have been realized on its sale, exchange or disposition of such land or building based on the gross selling price or fair market value as determined in accordance with Section 6 (E) of the Tax Code of 1997, whichever is higher, of such land and/or building. [Sections 27 (D) (5) Tax Code of 1997] This rule applies, whether or not the seller-corporation is engaged in real estate business. On the other hand, it is only when the real property being sold is an ordinary asset that the withholding tax rates imposed under Section 2.57.2 of Revenue Regulations No. 2-98, as amended, shall apply. (BIR Ruling No. 27-02 dated July 3, 2002) Based on your representation, the property of MASAITO 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 FMV as determined in accordance with Section 6 (E) of the Tax Code of 1997, whichever is higher. (BIR Ruling Nos. DA-217-99 and DA-010-02 dated April 12, 1999 and January 29, 2002) Corollarily, only such real properties held by a real estate developer primarily for sale or lease to customers in the ordinary course of its real estate development business, and therefore, would be properly included in the inventory of such taxpayer if on hand at the close of the taxable year, or used in his trade or business, area appropriately classified as ordinary assets. Otherwise stated, real properties of a real estate developer other than those enumerated under Section 39 (A) (1) of the Tax Code of 1997 and Section 2 (b) of Revenue Regulations No. 7-2003 are properly deemed as capital assets. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Legal Service