VIPS Consultants, Inc.

October 1, 2009 BIR RULING [DA-(C-221) 574-09] 27 (D) (5); 39 (A) (1); DA-692-2006; DA-201-2006; DA-C-087-288-09 VIPS Consultants, Inc. 3/F Citimotors Building, corner Pasong Tamo & Don Bosco Sts., Makati City Attention: Benigno M. Fernandez President Gentlemen : This refers to your letter dated August 1, 2009 requesting for a ruling that the sale of a real property owned by VIPS CONSULTANTS, INC. ("VCI") is not subject to value-added tax but to capital gains tax and documentary stamp tax. ACaEcH It is represented that VCI is a domestic corporation duly registered with the Securities and Exchange Commission with principal office at 3/F Citimotors Building, corner Pasong Tamo & Don Bosco Sts., Makati City. Its primary purpose is to act as managers or managing agents of persons, firms, associations, corporations, partnerships and other entities; to provide management, investment and technical advice for commercial, industrial, manufacturing and other kinds of enterprises; and to undertake, carry on, assist or participate in the promotion, organization, management, liquidation or reorganization of corporation, partnerships and other entities, except the management funds, securities, portfolio or similar assets of the managed entities or corporation. VCI is the registered owner of a parcel of land in Paraiso St., Dasmarias Village, Makati City with a total area of 880 square meters covered by Transfer Certificate of Title No. 206952 (the "property"). The property has never been used by VCI in its trade or business, nor subjected to depreciation, nor held primarily for sale or lease to customers in the ordinary course of business, and never been offered for rent or actually leased to anybody since its acquisition. Based on the foregoing representations, you now request for confirmation of your opinion that above-mentioned property is a capital asset and the sale thereof not being made in the regular course of trade or business of VCI, is not subject to value-added tax under Sec. 106 (A) (1) (a) of the 1997 National Internal Revenue Code (NIRC), as amended, but to capital gains tax (CGT) as set forth under Sec. 27 (D) (5) of the NIRC and to the documentary stamp tax (DST) under Section 196 of the NIRC. In reply, please be informed that Sec. 27 (D) (5) of the 1997 NIRC, as amended, provides that a final tax of six percent (6%) is imposed on the gains 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 Sec. 6 (E) of the said Code, whichever is higher, of such lands and/or buildings. The term "capital asset" is negatively defined in Section 39 (A) (1) of the Tax Code, as ". . . property held by the taxpayer (whether or not connected with his trade of business), but does not include stock in trade of the taxpayer or other property of 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 Sec. 34; or real property used in trade or business of the taxpayer". Thus, where the property has become idle and vacant, does not form part of the inventory of the taxpayer for sale or lease to customers, and not actually used in business, this Office has consistently ruled that the same shall be considered as capital asset and the gain presumed to have been realized from its sale will be subject to the CGT when sold. (BIR Rulings DA-163-05 dated April 14, 2005, DA-040-03, DA-008-04 dated January 6, 2004, DA-152-04, DA-270-04 dated May 17, 2004, DA-155-05 dated April 14, 2005, DA-219-05 dated May 5, 2005) . HcTSDa It is noted, however, that under Revenue Regulations (RR) No. 7-2003, all real properties acquired by a taxpayer that is habitually engaged in the real estate business shall be considered ordinary assets. Sec. 2, pars. (d), (e) and (f) of RR No. 7-2003, defines the persons engaged in the real estate business, as follows: "d. Real estate dealer shall refer to any person engaged in the business of buying and selling or exchanging real properties on his own account as a principal and holding himself out as a full or part-time dealer in real estate. "e. Real estate developer shall refer to any person engaged in the business of developing real properties into subdivisions, or building houses on subdivided lots, or constructing residential or commercial units, townhouses and other similar units for his own account and offering them for sale or lease. "f. Real estate lessor shall refer to any person engaged in the business of leasing or renting real properties on his own account as a principal and holding himself out as lessor of real properties being rented out or offered for rent." Based on the above definitions, VCI, whose primary purpose is to engage in management service business, is not considered habitually engaged in the real estate business. In BIR Ruling DA-201-06 dated April 3, 2006, citing BIR Ruling Nos. DA-163-05 dated April 14, 2005 and 014-03 dated October 28, 2003 , the BIR held that where the seller is not engaged in the real estate business, a property not forming part of its inventory is considered a capital asset, thus: ". . . Considering that RS is not real estate dealer, real estate developer, and/or real estate lessor and its primary purpose is to carry on its agricultural business, the parcels of land to be sold by RS are not stock in trade or other real property of a kind which would properly be included in RS' inventory if on hand at the close of the taxable year. Nor are they real property held primarily for sale or lease to customers in the ordinary course of trade or business." In view of the foregoing, it is the considered opinion of this Office that the income to be derived by VCI from the sale of the above-mentioned parcel of land is not subject to the creditable/expanded withholding tax under Section 2.57.2 (J) of RR No. 2-98, as last amended by RR No. 30-2003, but to the capital gains tax of six percent (6%) based on the gross selling price or fair market value as determined in accordance with Section 6 (E) of the NIRC, as amended, whichever is higher, of such parcel of land pursuant to Section 27 (D) (5) of the NIRC. EaSCAH Moreover, under Section 109 (P) of the NIRC, as amended by Republic Act ("R.A.") 9337, and implemented by RR No. 16-2005, as amended by RR No. 4-2007, the sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business shall be exempt from VAT. Considering that VCI is primarily engaged in the business of management services, the above-mentioned parcel of land is not being held by VCI primarily for sale to customers or held for lease in the ordinary course of trade or business. The sale by VCI of the parcel of land shall be exempt from VAT (BIR Ruling Nos. DA-130-a-2003 dated April 25, 2003 and VAT Ruling No. 034-2001 dated June 13, 2001) . Finally, the deed of sale conveying the above-mentioned parcel of land shall be subject to the documentary stamp tax imposed under Section 196 of the NIRC, 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 NIRC, whichever is higher. This serves as an authority for the concerned Revenue District Officer to immediately issue the Certificate Authorizing Registration in favor of the buyer to effect the transfer of the title of the property in the latter's favor. This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, however, it is 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