Polyfoam Enterprises Philippines, Inc.

December 4, 2008 BIR RULING [DA-(C-159) 493-08] Sec. 27 (D) (5); RR 7-2003; DA (C-102) 324-2008 dtd 10/22/08 Polyfoam Enterprises Philippines, Inc. 35 Insurance St., Brgy. Sangandaan GSIS Village, Quezon City Attention: Armando P. Santos Chief Accountant Gentlemen : This refers to your letter dated October 12, 2008, requesting a confirmation of your opinion that the sale by POLYFOAM ENTERPRISES PHILIPPINES, INC. of its parcel of land which is classified as capital asset is subject to capital gains tax under Section 27 (D) (5) of the Tax Code of 1997. Documents submitted disclosed that POLYFOAM ENTERPRISES PHILIPPINES, INC. (POLYFOAM, for short) is a domestic corporation registered with the Securities and Exchange Commission (SEC) on March 15, 1989; that its primary purpose is to engage in the manufacture and production of urethane and latex foam, adhesives, chemicals and to deal in, sell and distribute all kinds of goods and chattels and merchandise which are or may be the subject of commerce of man such as but not limited to polypropylene glycol, isoyante, oil con, freon and chemicals generally to engage as general merchant in local trading by wholesale and retail basis; that POLYFOAM during its operation, acquired several parcels of land which were not used in business; that most of which remained idle and undeveloped; that recently, the corporation has entered into serious negotiation to sell the property located at Peacock corner Windsor Streets, Brgy. Fairview Capitol, Quezon City, covered by Transfer Certificate of Title No. 6624, consisting of 18,770 square meters; that subject property is a capital asset as it is in fact classified under the company's books as investment property; that it has a residential structure built thereon purposely as a living quarter of the caretakers to prevent the unlawful settlement of squatters in the said property; that the residential house is already dilapidated and ready for demolition in the event the sale transaction is consummated; that there is no income recognized from the use of the structures; that your company is not engaged as a realtor and the property is neither leased to any person nor held primarily for sale to customers nor actually used in the business; that POLYFOAM has no commercial operations for more than ten (10) years now; and that the management plans to discontinue its operations and will finally close down the business. In reply, please be informed that under Section 27 (D) (5) of the Tax Code of 1997, as amended, a final tax of six percent (6%) is 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. On the other hand, under Sec. 39 (A) (1) of the 1997 Tax Code, as amended, the term "capital assets" is negatively defined as property held by the taxpayer (whether or not connected with his trade or business) but does not include: (i) 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 (ii) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or (iii) 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 (iv) real property used in trade or business of the taxpayer. Considering that POLYFOAM is a manufacturing company and not a realtor, the subject property classified under its books as investment property is rightfully treated as capital asset. It is a residential lot which is not substantially developed to its fullest potential, but was used only as the living quarter of the caretakers of the property. It remained idle and unproductive for business purposes as these was no income derived from such. Besides, the company had not been in operations for more than ten (10) years and is now contemplating dissolution. Inasmuch as it is an investment property under its books, the subject property does not fall under any of the assets enumerated under Section 39 (A) (1) of the Tax Code of 1997, as amended, and of Revenue Regulations No. 7-2003. (BIR Ruling No. DA-152-2004 dated March 31, 2004 cited in BIR Ruling No. DA-270-04 dated March 17, 2004) The sale by POLYFOAM of the said property is subject to the 6% capital gains tax imposed under Section 24 (D) 5 of the Tax Code of 1997, as amended. TIDcEH Moreover, the sale of the above property of POLYFOAM treated as capital asset is not subject to the 12% value-added tax imposed under Section 106 of the Tax Code of 1997, as amended. However, it is subject to the 1.5% documentary stamp tax imposed under Section 196 of the same Code. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service