Makati Cinema Square Corporation

December 3, 2008 BIR RULING [DA-(C-151) 483-08] 27 (D) (5); 39 (A) (1); 109 (P); DA-395-2007; DA-478-2008 Makati Cinema Square Corporation Makati Cinema Square, Pasong Tamo Ext. San Lorenzo Village, Makati City Attention: Mr. Ros Rufino President Gentlemen : This refers to your letter dated November 14, 2008 requesting for confirmation of your opinion that: 1. The vacant and/or idle properties covered by Condominium Certificates of Title (CCT) No. 5000, 3057, 3058, 3059, 3060, and 2965 ("Properties") which were never used by Makati Cinema Square Corporation ("MCSC" for brevity) in its trade or business, nor subjected to depreciation, nor included in its stock in trade or inventory, nor held primarily for sale or lease to customers in the ordinary course of its trade or business, and never rented out to any one since its acquisition, are classified as capital assets in the hands of MCSC; 2. The sale of the said vacant and/or idle real properties covered by CCT Nos. 5000, 3057, 3058, 3059, 3060, and 2965 classified as capital assets in the hands of MCSC are subject to the 6% capital gains and 1.5% documentary stamp taxes pursuant to Sections 27 (D) (5) and 196 of the Tax Code of 1997; and 3. The sale of the vacant and/or idle real properties, not being used in the ordinary course of the trade or business of MCSC is not subject to the 12% value-added tax. It is represented that MCSC is a domestic corporation duly registered with the Securities and Exchange Commission primarily engaged to undertake and carry on the business generally of dealers of cinematograph installations, theatrical proprietors, managers for public entertainments, cinematograph exhibitions, and other kinds of entertainment in the Philippines and elsewhere; to establish, maintain, operate, manage and control theatres, opera houses, public halls and other places of amusement and exhibit, preserve and exploit therein attractions of various kinds and natures, including moving pictures, talking pictures, dramatic, operatic and musical performances vaudeville, intellectual and instructive entertainments; to provide, engage and employ managers, teachers, actors, theatrical and musical artists and employees; and to undertake and carry out all things incidental to such enterprises or bailees cinematograph or other films, materials, machines, apparatus and supplies, and to sell, re-sell, lease, sub-let, lend and otherwise deal with the same which are the lawful objects of commerce; that MCSC is the registered owner of six (6) condominium units in the City of Makati which are embraced under CCT No. 5000, 3057, 3058, 3059, 3060, and 2965 issued by the Registry of Deeds for Makati City; that these condominium units have never been developed or used by MCSC in the ordinary course of its trade or business; that from the time of its acquisition in the name of MCSC, these properties have remained vacant and idle and were not held and owned primarily by MCSC for sale to customers in the ordinary course of its trade or business; that these assets have been classified as "investments" in the books of the corporation; that these were not subjected to depreciation, nor included in the inventory of properties for lease, and never been offered for rent or actually leased to anybody since its acquisition and as such these have always been treated by MCSC as capital assets; that MCSC did not derive any income at all from the said properties; that these are the full proofs that the subject realties were never and are not used in the ordinary course of trade or business of the company; and that since the subject properties produce no income at all to the company and due to lack of interest of the corporation in maintaining the said properties, the Board of Directors of MCSC have decided to sell the subject properties to any interested buyer. In reply, please be informed that the term "capital asset" as negatively defined in Section 39 (A) (1) of the Tax Code of 1997, as amended, 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. CAETcH Furthermore, in applying the provisions of Revenue Regulations (RR) No. 7-2003, particularly Section 3 (e) thereof, which provides to wit: "SEC. 3. Guidelines in Determining Whether a Particular Real Property is a Capital Asset or Ordinary Asset . xxx xxx xxx e. Treatment of abandoned and idle real properties. xxx xxx xxx. 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." (Emphasis supplied.) EaCSTc real properties owned by taxpayers not engaged in the real estate business or referring to those persons other than real estate dealers, real estate developers and/or real estate lessors, and those taxpayers deemed to be engaged in the real estate business whose primary purpose of engaging in business, or whose Articles of Incorporation states that its primary purpose is to engage in the real estate business, shall, upon showing of proof that the same have not been used in business for more than two (2) years prior to the consummation of the taxable transactions involving the said real properties, and though classified as ordinary assets, be automatically converted into capital assets. In view of the foregoing, and considering that MCSC is a taxpayer not engaged in the real estate business, whose primary purpose is to undertake and carry on the business generally of dealers of cinematograph installations, theatrical proprietors, managers for public entertainments, cinematograph exhibitions, and other kinds of entertainment in the Philippines and elsewhere, it is the considered opinion of this Office that the Properties are considered as capital assets and consequently, the income that will be derived from the sale of the said Properties is not subject to the creditable withholding tax (expanded) under Sec. 2.57.2 (J) of Revenue Regulations (RR) No. 2-98, as amended, but to the capital gains tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Sec. 6 (E) of the Tax Code of 1997, as amended, whichever is higher, of such land and/or buildings pursuant to Sec. 27 (D) (5) of the same Code. ( BIR Ruling No. DA-395-2007 dated July 19, 2007 ) AcCTaD More recently, in BIR Ruling No. DA-669-2004, dated December 28, 2004, it was reiterated that the assignment by UIBC of its real properties, specifically the buildings which used to house the converting equipment, machinery and parts that were used in its cement paper bags manufacturing business, to RCBC as payment of UIBC's loan to the latter is exempt from VAT inasmuch as the said properties are not among the stock in trade of UIBC and due to the fact that UIBC was not primarily engaged in the buying and selling of real properties, nor in the leasing of properties. 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. 048-98, it was held that the sale by Eastern Canumay Industrial Development Corporation of its property to Ultimate Innovations, Inc. is not subject to VAT. In this ruling, Eastern Canumay Industrial Development Corporation, which is engaged in the production of marble and other marble products, owned several properties, one of which was sold to Ultimate Innovations, Inc. Since the property sold is not primarily held for sale in the ordinary course of trade or business, then its sale is not subject to VAT. Also, in VAT Ruling No. 034-01, dated June 13, 2001, it was reiterated that the sale of real property may only be imposed the 10% [now 12%] VAT provided the same is primarily held for sale to customers or held for lease in the ordinary course of trade or business. Since the gas pipeline being sold is not held by FGP Corporation primarily for sale to customers or held for lease in the ordinary course of its trade or business, considering that its business involves the operation of the aforesaid power generating plant, it follows that FGP Corporation is not subject to VAT with respect to the sale of the gas pipeline, pursuant to the aforesaid provision of the Code and its implementing rules and regulations. AHEDaI Thus, since the aforementioned Properties are not primarily held for sale to customers or held for lease in the ordinary course of trade or business, the sale of the aforesaid properties by MCSC is not subject to the 12% value-added tax, pursuant to Section 109 (P) of the Tax Code of 1997, as amended by Republic Act No. 9337, and its implementing rules and regulations. (VAT Ruling No. 034-2001 dated June 13, 2001 and BIR Ruling No. DA-669-2004 dated December 28, 2004) Finally, the deed of sale conveying the above-mentioned condominium units shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 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 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. LLpr Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service