Quiason Makalintal Barot Torres & Ibarra

November 24, 2009 BIR RULING [DA-(C-280) 699-09] 27 (D) (5); RR-7-2003; 014-2003; DA(C-020) 100-2008; DA-270-2004; DA-420-2005; DA-219-2005; DA-152-2004 Quiason Makalintal Barot Torres & Ibarra 21st Floor, Robinsons-Equitable Tower 4 ADB Avenue Corner Pedro Poveda Avenue 1605 Ortigas Center, Pasig City Attention: Atty. Benedict R. Tugonon and Suzie A. Fernandez Gentlemen : This refers to your letter dated November 16, 2009 requesting on behalf of your client, MME Property Holdings Inc. (the "MMEPH") for confirmation of your position, that: 1. Vacant and/or idle land of MMEPH located at corner Molava and Narra Streets, Valle Verde, Ugong, Pasig City, with a total area of Seven Hundred Sixty Eight (768) square meters covered by TCT No. PT-116406 of the Register of Deeds of Pasig City (the "Property"), which was never used in its trade or business, nor subjected to depreciation, nor included in its stock in trade or inventory, nor primarily held for sale or lease to customers in the ordinary course of its business, and never rented out to anyone since its acquisition, and it is classified as capital asset in the hands of MMEPH; 2. The sale, transfer or assignment of the said vacant and/or idle real property classified as capital asset in the hands of MMEPH is subject to the 6% capital gains tax and the documentary stamp tax, pursuant to Sections 27 (D) (5) and 196 (b), respectively, of the National Internal Revenue Code, as amended (the "Tax Code"); and 3. The sale, transfer or assignment of the said vacant and/or idle real property, not being used in the ordinary course of the trade or business of MMEPH is not subject to value-added tax ("VAT") imposed under Section 106 (A) (1) (a) of the Tax Code. DETcAH The facts as represented are as follows: MMEPH, is a corporation duly organized and existing under and by virtue of the laws of the Philippines with business address at # 215 Orbit Street, Bel-Air Village, Makati City. MMEPH is engaged in real estate business with primary purpose of owning, using, improving, developing, selling and holding for investment, real estate of all kinds. However, MMEPH has never commenced operation since its incorporation. MMEPH is the absolute and registered owner of the property, which is a contiguous piece of undeveloped, unimproved, idle, vacant and raw land and has never formed part of MMEPH's inventory for sale to customers and has not been used in its trade or business since the date of its acquisition. The Property is originally owned by Spouses Manuel A. Estrella and Maria Victoria Padilla-Estrella. The Spouses Estrella, through a tax-free exchange, transferred the subject land in exchange for Ten Thousand (10,0000) shares of stock of MMEPH. The Property has never been actually used in business; and in audited financial statements of MMEPH, the Property is reflected as an investment and not as part of its stock in trade or inventory. In fact, the property is classified under non-current assets of MMEPH. MMEPH has always held the land as a capital asset as shown in the balance sheet of MMEPH. Further, the property is undeveloped, unimproved, vacant, and has been idle for ten (10) years. In fact, on October 28, 2008 MMEPH paid to the City of Pasig the amount of One Hundred Twenty Thousand Pesos (P120,000.00) representing the tax on idle land. In connection therewith, it is your position that the Property is a capital asset of MMEPH, the same being an idle, raw, undeveloped, unimproved land not forming part of MMEPH's inventory for sale to customers and has not been used in its trade or business. 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." EIcSTD The character of the real property involved in the transaction must primarily be determined, i.e., whether or not it is capital or ordinary asset, prior to the application of the appropriate tax rates. Under Section 39 (A) (1) of the 1997 Tax Code, the term "capital asset" 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 or lease to customers in the ordinary course of trade or business; or (iii) property used in 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. (BIR Ruling No. 27-02 dated July 3, 2002) 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." Considering that MMEPH had never commenced commercial operations since its incorporation and considering further that the subject Property registered under MMEPH's name is reflected as an investment and classified under the non-current assets in the financial statements of MMEP; had not been used in business since inception and was never leased out nor held it out for sale in the ordinary course of trade or business, nor included as part of its inventories nor did it derive any income at all, the above subject Property is properly treated and classified as a capital asset. The sale of the subject Property, therefore, is subject to the 6% capital gains tax imposed under Section 27 (D) (5) of the 1997 Tax Code and to the documentary stamp tax of 1.5% imposed under Section 196 of the same Code, based on the gross selling price or fair market value as determined in accordance with Section 6 (E) of the 1997 Tax Code, whichever is higher. acIHDA 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. 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 MMEPH, the sale of the above-mentioned Property is exempt from the 12% value-added tax (VAT) pursuant to Section 109 (P) of the Tax Code of 1997, as amended by Republic Act No. 9337, and implemented by Revenue Regulations No. 16-2005, as amended. 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