Aranas Consunji Barleta

July 28, 2009 BIR RULING [DA-(C-152) 413-09] 27 (D) (5); RR 7-2003; DA (C-020) 100-08; DA 567-07; DA 397-2000; DA 219-05; DA 654-06 Aranas Consunji Barleta Unit 106 G/F Le Metropole Building 326 Tordesillas cor. De la Costa Streets Salcedo Village, Makati City Attention: Atty. Ma. Louella M. Aranas Gentlemen : This refers to your letter dated July 21, 2009 requesting in behalf of your client, Aquaprime Philippine International, Inc. (hereinafter "Aquaprime") for confirmation that sale by Aquaprime of its properties to Social Homes, Inc. (hereinafter "Social") shall have the following tax implications: 1. The parcels of land and the warehouse of Aquaprime which remained idle since 2007 is a capital asset subject to 6% capital gains tax; 2. The sale of the aforestated properties shall be subject to documentary stamp tax; and 3. The sale of the subject realties shall be exempt from value-added tax (VAT). It is represented that Aquaprime is a domestic corporation duly organized and existing under the laws of Philippines with principal place of business at 433 R. Pascual Street, Pleasant Hills, Mandaluyong City; that it is engaged in the business of manufacturing, importing, exporting, buying, selling or otherwise dealing in, at wholesale and retail of such goods as animal and aquaculture feeds, feeds ingredients equipment and other goods of similar nature; that sometime in 2007 and due to business reversals, it ceased operations and that it now intends to sell its properties covered by Transfer Certificates of Title (TCT) Nos. C-401610, C-401611, C-401612 and C-401613, including a warehouse/plant which was used in its operations. In reply, 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. The definition of capital asset was further explained in BIR Revenue Regulation No. 7-2003 (RR No. 7-03). Under the said regulation, an ordinary asset which remained idle for a number of years may be converted into a capital asset. Hence: e. Treatment of abandoned and idle real properties. Real properties formerly forming part of the stock in trade of a taxpayer engaged in the real estate business, or formerly being used in the trade or business of a taxpayer engaged or not engaged in the real estate business, which were later on abandoned and became idle, shall continue to be treated as ordinary assets. Real property initially acquired by a taxpayer engaged in the real estate business shall not result in its conversion into a capital asset even if the same is subsequently abandoned or becomes idle. 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 in business for more than two (2) years prior to the consummation of the taxable transactions involving said properties. In BIR Ruling No. DA-567-07 dated October 25, 2007, it was held that: "The said plant has been totally shutdown since September 20, 2004 and was officially closed on February 5, 2005 due to labor dispute. From then on, the property has remained idle and never was utilized by GMC in its operations nor was it leased to third party. The said property was reclassified by GMC as capital asset and is recorded in its books as part of its other assets. The corresponding tax declarations for the machineries previously installed in the said property were cancelled since they were either moved to San Pedro or Cebu plant. GMC offered for sale to the public its above plant in Ugong, Pasig. GMC, however, realized that the above property could be more attractive to prospective buyers and/or land developers if the structures found thereon will be demolished . . . In view of the foregoing, and inasmuch as the aforementioned parcel of land of GMC is no longer used in its business since 2004 and that it lies idle from then on, the said realty, accordingly, are considered as capital asset." Being a sale of capital asset, the sale is not made in the course of trade or business of the taxpayer and as such, is not subject to VAT. In the same case mentioned above, in BIR Ruling No. DA-567-07, it was likewise held that: "Moreover, the sale of the above property by GMC, 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)." In view of the foregoing, we hereby confirm your opinion that: 1. The parcels of land and the warehouse of Aquaprime which remained idle since 2007 is a capital asset subject to 6% capital gains tax; 2. The sale of the aforestated properties shall be subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997; and 3. The sale of the subject realties shall be exempt from VAT. 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