Gastanes & Associates

November 16, 2009 BIR RULING [DA-(C-268) 673-09] 27 (D) (5); 39 (A) (1); BIR Ruling 014-03; DA-290-2006; 353-06; 692-06; 197-07; 349-08 Gastanes & Associates 11-IJ2 Burgundy Corporate Tower 252 Sen. Gil Puyat Avenue Makati City Attention: Atty. Edwin B. Gastanes Counsel Gentlemen : This refers to your letter dated October 8, 2009 requesting, on behalf of your client PUKA BEACH HOLDING CORP. ("PBHC"),for confirmation of your opinion that the sale of your client's real property, being a capital asset, is subject to the 6% capital gains tax and 1.5% documentary stamp tax but exempt from the 12% value-added tax. It is represented that PBHC is the registered owner of a vacant parcel of rawland located at Boracay Island, Barangay Yapak, Malay, Akalan, with a total area of thirty-eight thousand six hundred fourteen (38,614) square meters, more or less, covered by Transfer Certificate of Title No. T-36729 and Tax Declaration No. 05-0170305 (the "Property"). PBHC acquired the property in 2005 for long-term investment purposes and not for development or sale to customers in the ordinary course of trade or business. In the Company's books, the Property is classified as a capital asset. The Property is not under lease, is vacant since its acquisition, with no improvement or infrastructure of any kind. PBHC intends to sell the Property to San Miguel Properties, Inc. ("SMPI").Considering that the sale of the said property is not being made in the regular course of trade or business, nor is the property part of the stock in trade or inventory of the Company, it is your position that the sale 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. AaCTID In reply thereto, please be informed that Section 27 (D) (5) of the Tax Code of 1997, as amended, as implemented by Revenue Regulations No. 7-2003, provides "(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. A final tax of six percent (6%) is hereby 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." It is undisputed that the yardstick for determining whether the property is capital asset or ordinary asset is the actual use of the said property. Thus, if the property is not actually used in trade or business of the taxpayer, whether or not connected with his trade or business, or not held for lease or sale to customers, it will be classified as a capital asset. Moreover, if the property is merely held for investment purposes and remains vacant and idle, it is deemed a capital asset. This is fortified in BIR Ruling No. 014-2003 dated October 28, 2003, where this Office ruled that "It is apparent under the foregoing provision that for a property to be considered an ordinary asset it must be actually used in the business of the corporation. Accordingly, on the condition that Wendell Holdings Co.,Inc. is not habitually engaged in the real estate business as represented, the property under consideration is a capital asset. The property was neither held primarily for sale to customers nor actually used in the business of Wendell Holdings Co.,Inc. ...The property is not actually used in the business of Wendell Holdings Co.,Inc. as it has remained idle and undeveloped. Therefore, the sale of the property under consideration is a sale of a capital asset, not an ordinary asset. As such, the transaction is subject to capital gains tax of 6% under Section 27 (D) (5) and not to the creditable withholding tax." The phrase "taxpayers engaged in the real estate business" refers collectively to real estate dealers, real estate developers, and/or real estate lessors. Conversely, the term "taxpayer not engaged in the real estate business" shall refer to persons other than real estate dealers, real estate developers and/or real estate lessors. A taxpayer 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 be deemed to be engaged in the real estate business for purposes of these Regulations. (Sec. 2 (g), Revenue Regulations No. 7-2003) SDHAEC Inasmuch as PBHC is not primarily engaged in real estate business, but is merely a holding company organized to acquire, purchase, own or hold for investment real estate of all kinds, it is deemed not engaged in the real estate business. Moreover, the aforementioned real property of PBHC is properly classified as capital asset because PBHC holds such property as investment; it has never used said realty in business, hence, the property was never subjected to depreciation, and the property has never formed part of PBHC's inventory of properties. Consequently, the sale of the property is not subject to the expanded withholding tax under Revenue Regulations No. 2-98, as amended, but only to the 6% capital gains tax (CGT) imposed under Section 27 (D) (5) of the 1997 Tax Code, as amended, and also subject to documentary stamp tax (DST) at the rate of P15.00 for each P1,000.00 or fractional part thereof in excess of P1,000.00, or 1.5% of the consideration or fair market value of the properties, whichever is higher, pursuant to Section 196 of the same Code. Corollary thereto, Section 14 (B) (p) (1) of Revenue Regulations No. 4-2007, amending Section 4.109-1 (B) (p) (1) of Revenue Regulations No. 16-2005, implementing Republic Act No. 9337 (Reform VAT Law), provides "(p) The following sales of real properties are exempt from VAT, namely: (1) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business. However, even if the real property is not primarily held for sale to customers or held for lease in the ordinary course of trade or business but the same is used in the trade or business of the seller, the sale thereof shall be subject to VAT being a transaction incidental to the taxpayer's main business." 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. 012-02 , it was held that the sale of properties of MGM Motor Trading, Inc. is not subject to VAT since the properties sold were neither primarily held for sale to customers nor for lease in the ordinary course of its trade or business. Also in BIR Ruling No. DA-665-06 , dated November 14, 2006, the BIR has ruled that sale of real properties of Benson Realty & Development Corporation, which are not primarily held for sale to customers in the ordinary course of trade or business nor included as part of its inventory of property for lease, is not subject to the 12% VAT. Likewise, in DA-685-06 ,dated November 30, 2006, it was reiterated that the sale of real properties of Union Ajinomoto Realty Corporation, not being used in the ordinary course of its trade or business, is not subject to the 12% value-added tax. CSDcTA Accordingly, as the property under consideration was neither primarily held for sale or for lease to customers nor actually used in the ordinary course of trade or business of PBHC, the sale thereof is exempt from the 12% value-added tax (VAT) pursuant to Section 14 (B) (p) (1) of Revenue Regulations No. 4-2007, implementing Republic Act No. 9337. Such being the case, this Office hereby confirms your opinion that the sale of the above-mentioned property which has long remained idle and vacant since its acquisition and considered as capital asset, is: (1) subject to the capital gains tax of 6% pursuant to Section 27 (D) (5) of the Tax Code of 1997, as amended; (2) subject to DST at the rate of P15.00 for each P1,000.00 or fractional part thereof in excess of P1,000.00, or 1.5% of the consideration or fair market value of the properties, whichever is higher, pursuant to Section 196 of the Tax Code of 1997, as amended; and (3) exempt from 12% VAT, the property not being primarily held and offered for sale or lease to customers in the ordinary course of PBHC's trade or business, as provided under Section 109 (w) of the Tax Code of 1997, as amended. (BIR Ruling No. DA-270-04 dated May 17, 2004) 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service