Teoville Development Corporation

November 13, 2009 BIR RULING [DA-(C-265) 670-09] 27 (D) (5); 39 (A) (1) RR 7-2003; DA-301-2004; DA-620-2006; VAT Ruling No. 034-2001; DA-155-05; DA-290-06; DA-(C-052) 185-09 Teoville Development Corporation 4/F, 8728 Saville Building, Paseo de Roxas Makati City Attention: Mr. Gerardo V. Alzate Gentlemen : This refers to your letter dated October 27, 2009 requesting for confirmation of your opinion that your vacant and idle real properties are considered as capital asset and its sale shall be subject to the 6% capital gains tax ("CGT") and 1.5% documentary stamp tax ("DST") and therefore exempt from the 12% value-added tax ("VAT"). It is represented that Teoville Development Corporation is a corporation duly organized and existing under the laws of the Philippines; that one of its purposes is to own, hold, purchase, improve, develop, lease or otherwise acquire, subdivide and manage all kinds of land, public or private; that it is the registered owner of the following properties: TCT No. Area Location 89354 684 sq. m. Teoville Subd.,BF Homes, Sucad Road, Paraaque, Metro Manila 196402(47890) 540 sq. m. Teoville Subd.,BF Homes, Sucad Road, Paraaque, Metro Manila 196403(47891) 540 sq. m. Teoville Subd.,BF Homes, Sucad Road, Paraaque, Metro Manila 196406 540 sq. m. Teoville Subd.,BF Homes, Sucad Road, Paraaque, Metro Manila 196407 513 sq. m. Teoville Subd.,BF Homes, Sucad Road, Paraaque, Metro Manila 89355 705 sq. m. Teoville Subd.,BF Homes, Sucad Road, Paraaque, Metro Manila 196485(47895) 540 sq. m. Teoville Subd.,BF Homes, Sucad Road, Paraaque, Metro Manila 196486(47896) 1,419 sq. m. Teoville Subd.,BF Homes, Sucad Road, Paraaque, Metro Manila 196487 707 sq. m. Teoville Subd.,BF Homes, Sucad Road, Paraaque, Metro Manila 196488 540 sq. m. Teoville Subd.,BF Homes, Sucad Road, Paraaque, Metro Manila 196489 540 sq. m. Teoville Subd.,BF Homes, Sucad Road, Paraaque, Metro Manila 196490 540 sq. m. Teoville Subd.,BF Homes, Sucad Road, Paraaque, Metro Manila 196491 540 sq. m. Teoville Subd.,BF Homes, Sucad Road, Paraaque, Metro Manila that the above-described properties are idle and with no improvements and were never used in any business transactions/operations for many years as shown in the financial statements; that said properties were recorded under investment account with the intention of profitable selling on a later period; and that however, on this date, said properties were sold to SM Prime Holdings, Inc. aESHDA In reply, please be informed that pursuant to Section 27 (A) of the Tax Code of 1997, as amended, whenever a corporate real estate developer sells real properties forming part of its inventory or those primarily held for sale or lease to customers, it is considered as sale of ordinary assets subject to corporate income tax. However, when the real estate involved is idle and have not been used in business for more than two (2) years prior to the consummation of the taxable transactions involving the said real estate, and though classified as ordinary assets, be automatically converted into capital assets. (Sec. 3 (e) of Revenue Regulations No. 7-2003) Thus, if the real property is a land or building which is converted into and treated as a capital asset of the seller-corporation, then the final tax of six percent (6%) shall be imposed on the gain presumed to have been realized on its sale, exchange or disposition of such land or building based on the gross selling price or 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 building. [Section 27 (D) (5), Tax Code of 1997] This rule applies, whether or not the seller-corporation is engaged in real estate business. On the other hand, it is only when the real property being sold is an ordinary asset that the withholding tax rates imposed under Sec. 2.57.2 of Revenue Regulations 2-98, as amended, shall apply. (BIR Ruling No. 27-02 dated July 3, 2002) Based on your representations, from the time of acquisition of the properties, the same were never developed or used by Teoville Development Corporation in the ordinary course of its trade or business and have remained vacant and idle. The properties were not included in the inventory of properties and were recorded in the books of Teoville Development Corporation under the investment account and have always been treated by the latter as its capital asset. Such being the case, the income to be derived from the sale of the said properties are not subject to the expanded withholding tax under Sec. 2.57.2 (J) of Revenue Regulations (RR) No. 2-98, as amended by RR 30-2003, but only to the 6% capital gains tax imposed under Sec. 27 (D) (5) of the Tax Code of 1997, as amended, and to the documentary stamp tax under Section 196 of the same Code, based on the gross selling price or fair market value (FMV) as determined in accordance with Section 6 (E) of the same Code, whichever is higher. (BIR Ruling Nos. DA-217-99 & DA-010-02 dated April 12, 1999 and January 29, 2002) Corollarily, only such properties held by a real estate developer primarily for sale or lease to customers in the ordinary course of its real estate development business, and therefore, would be properly included in the inventory of such taxpayer if on hand at the close of the taxable year, or used in his trade or business, are appropriately classified as ordinary assets. Otherwise stated, real properties of a real estate developer other than those enumerated under Section 39 (A) (1) of the Tax Code of 1997 and Section 2 (b) of Revenue Regulations No. 7-2003 are properly deemed as capital assets. cDHAES Considering that the properties were never been developed or used by Teoville Development Corporation in the ordinary course of its trade or business from the time of its acquisition, has remained vacant and idle, nor included in the inventory of property for sale or lease since its acquisition, it is the considered opinion of this Office that the afore-mentioned real properties are considered as capital asset. As such, the sale of the said properties shall be subject to the capital gains tax under Section 27 (D) (5) of the Tax Code of 1997, as amended. Moreover, under Section 109 (P) of the Tax Code, as amended by RA 9337, 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 the properties of Teoville Development Corporation have been vacant and idle for many years and were treated as its capital asset and were not included in the inventory of property for lease in the ordinary course of Teoville Development Corporation's business, the above-mentioned properties are automatically converted into capital asset. Hence, the sale by Teoville Development Corporation of the said properties 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 properties 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. 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