Mabasa and Company, Inc.

November 27, 2009 BIR RULING [DA-(C-290) 712-09] Sec. 27 (D) (5); 39 (A); RR 7-2003; UN-276-95; DA-397-2000; DA-219-05; DA-654-06; DA-567-07; DA(C-232) 599-09 Mabasa and Company, Inc. No. 39 Valencia St., New Manila Quezon City Attention: Mr. Jaime Dee President Gentlemen : This refers to your letter dated October 5, 2009 requesting for a ruling on the applicability of the provisions of Sec. 27 (D) (5) of the Tax Code of 1997, as amended, on the sale by Mabasa and Company, Inc. of its real properties. The facts as represented are as follows: Mabasa and Company, Inc. is a domestic corporation established under the laws of the Republic of the Philippines on August 28, 1948. It is mainly engaged in the business of buy and sell, exportation and importation of general merchandise of all kinds and descriptions. Its corporate term supposedly expired on August of 1998, however, it was extended by another twenty-five (25) years, the said extension being approved by the Securities and Exchange Commission (SEC) on April 24, 1998. Mabasa and Company, Inc. owns two (2) parcels of land located in Valencia, New Manila, Quezon City, covered by Transfer Certificates of Title (TCT) No. RT-3418 (11756) of the Registry of Deeds of Quezon City, with existing improvements found thereon covered by Tax Declaration Nos. D-130-02793, D-130-03225 and D-130-02794. The said properties are residential properties used by the incorporators of the company. Due to the prevalent global financial crisis, the company has suffered business reverses resulting for it to stop its business operations. For the past three (3) years it only filed its Income Tax Return (ITR) with the declaration that it earned no income. Neither the company earned any income from the real properties it possessed. The company is contemplating of selling its above realties in order to raise funds so it may continue its business operations. DacTEH In view thereof, the company is requesting for a ruling classifying the above realties as capital assets thereby the sale thereof is subject only to the capital gains tax and since the same are treated as capital assets the sale of the same is not subject to the 12% value-added tax (VAT). In reply thereto, please be informed that the term "capital assets" 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 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 allowances for depreciation provided in Subsection (F) of Section 34, or real property used in trade or business of the taxpayer. In view of the foregoing, and inasmuch as the aforementioned real properties of Mabasa and Company, Inc. are used as residential properties and neither did the company earned any income therefrom, the said real properties, therefore, are properly considered as capital assets. Consequently, the sale of said real properties is subject to the 6% capital gains tax under Section 27 (D) (5) of the Tax Code of 1997, as amended. Likewise, the said sale is subject to the documentary stamp tax imposed under Section 196 of the same Tax Code. (BIR Ruling Nos. DA (C-232) 599-09 dated October 14, 2009, DA-567-05 dated October 25, 2007 & DA-397-2000 dated November 20, 2000 citing UN-276-95 dated July 26, 1995; Rev. Regs. No. 7-2003) Moreover, the sale of the above real properties by Mabasa and Company, Inc., treated as its capital assets, is not subject to the 12% value-added tax imposed under Section 106 of the 1997 Tax Code, as amended, in accordance with Sec. 4.109-1 (B) (p) of Revenue Regulations No. 16-2005, implementing Republic Act No. 9337. (BIR Ruling No. DA (C-232) 599-09, supra , DA-219-2005 dated May 5, 2005 cited in BIR Ruling Nos. DA-653 & 654-2006, both dated November 7, 2006 & DA-567-05 dated October 25, 2007) 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service