Dulay Pagunsan & Ty

August 20, 2009 BIR RULING [DA-(C-184) 470-09] 27 (D) (5); 39 (A) (1); RR 7-2003; RR 16-2005; DA-060-2003; DA-301-2004; DA-669-2004; VAT Ruling Nos. 048-98 & 034-2001 Dulay Pagunsan & Ty Strata 100 Building, Suite 1300 F. Ortigas Jr. Road, Ortigas Center Pasig City Attention: Atty. Allan U. Ty Gentlemen : This refers to your letter dated August 10, 2009 requesting on behalf of your client, Mr. Que Chi Beng, for confirmation of your opinion that the sale of his real property with improvements which is not primarily held for lease or for sale and not used in business and has been idle for almost 10 years is subject to capital gains tax and not to value-added tax (VAT). It is represented that Mr. Que Chi Beng is the registered and lawful owner of a certain real property with improvements situated at No. 210, Shaw Boulevard, Mandaluyong City, consisting of One Hundred Thirty (130) square meters, under Transfer Certificate of Title No. 30973 ("Subject Property" for brevity); that Mr. Que Chi Beng is now retired and already 69 years old; that he is selling the Subject Property to a third party; that the subject property is not primarily held for lease or for sale and unused in business and has been idle for almost 10 years; and that in support of your request, you submitted the following: (1) Transfer Certificate of Title No. 30973; (2) Tax Declaration of Real Property; (3) Pictures of the Subject Property; and (4) Other pertinent documents. In reply, please be informed that the term "capital asset" 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 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. TDcCIS 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.) 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 Mr. Que Chi Beng is a taxpayer not engaged in the real estate business, being not a real estate dealer, developer or lessor; and that the aforementioned real property with improvements had already been idle and vacant for almost 10 years and had not been used in the ordinary course of trade or business, it is the considered opinion of this Office that the income derived from the sale thereof is not subject to the creditable withholding tax (expanded) under Sec. 2.57.2 (J) of 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 Section 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-301-2004 dated June 1, 2004) ETCcSa 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. Thus, since the aforementioned real 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 Mr. Que Chi Beng is not subject to the 12% value-added tax, pursuant to the aforesaid provision of the Tax Code of 1997, as amended, 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 Subject Property shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, 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. STcEIC 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