Quiason Makalintal Barot Torres Ibarra & Sison

December 21, 2009 BIR RULING [DA-(C-330) 803-09] 27 (D) (5); 39 (A) (1) RR 7-2003; DA-301-2004; DA-305-05; DA-219-05; DA-420-05; DA-560-06; DA-620-2006 Quiason Makalintal Barot Torres Ibarra & Sison 21st Floor, Robinsons-Equitable Tower 4 ADB Avenue corner Pedro Poveda Street 1605 Ortigas Center, Pasig City, Philippines Attention: Atty. Benedict R. Tugonon Gentlemen : This refers to your letter dated December 4, 2009 requesting on behalf of your client, Hydee Management & Resource Corporation ("Hydee Management") for confirmation of your opinion that the reconveyance or assignment by Hydee Management of its vacant and idle property consisting of a parcel of land without any improvement located at 2420 Bougainvilla Street, Dasmarias Village, Makati City, and covered by Transfer Certificate of Title No. 225577 (the "Property") to Pan Malayan Management & Investment Corporation ("PMMIC") is subject only to capital gains tax and is not subject to regular income tax and value-added tax ("VAT"). TIADCc Hydee Management is a corporation duly organized and existing under and by virtue of the laws of the Philippines with office address at 4/F Tower I, Quintin Paredes, Binondo, Manila. PMMIC is a corporation duly organized and existing under and by virtue of the laws of the Philippines with office address at 48/F Yuchengco Tower, RCBC Plaza, Ayala, Makati. On August 27, 2008, Hydee Management acquired the Property from PMMIC, which Property was already idle and vacant at that time. On January 12, 2009, Hydee Management returned the Property to PMMIC, as evidenced by a Deed of Reconveyance dated January 12, 2009. The subject Property is a parcel of land classified as residential without any improvement thereon. The same is not in any way used by Hydee Management in its trade or business. An inspection of the Property would reveal the lack of activity in the area. A physical or ocular inspection of the Property will conclusively demonstrate that the parcel of land has no improvement, idle and is not actively used in any trade or business. During the five (5) month period during which Hydee Management owned the Property, it never derived any income from the said Property and the same was never leased or rented out for business. In the books of Hydee Management, the said Property is reflected under Investment and not part of Plant, Property and Equipment. In reply, please be informed that the term "capital asset" as negatively defined in Section 39 (A) (1) of the 1997 Tax Code, as amended, 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 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 Section 34, or real property used in trade or business of the taxpayer. Furthermore, Section 3 (4) of Revenue Regulations ("RR") No. 7-2003 provides that all real properties acquired in the course of trade or business by a taxpayer habitually engaged in the sale of real estate shall be considered as ordinary assets. As defined under Section 2 (g) of RR 7-2003, taxpayers engaged in the real estate business shall refer collectively to 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 the regulations. ScAaHE Considering that Hydee Management is not a real estate dealer, real estate developer, and/or real estate lessor, the parcel of land (Property) reconveyed by Hydee Management is not stock in trade or other real property of a kind which would properly be included in Hydee Management's inventory if on hand at the close of the taxable year. Nor is it real property held primarily for sale or lease to customers in the ordinary course of trade or business. (BIR Ruling Nos. DA-163-05 dated April 14, 2005 and 014-03 dated October 28, 2003). Furthermore, in BIR Ruling No. 014-03, dated October 28, 2003, it was ruled that for a property to be considered an ordinary asset, it must be actually used in the business of the corporation. The BIR stated that on the condition that the taxpayer concerned was not habitually engaged in the real estate business, the property not actually used in the business of the taxpayer, the same having remained idle and undeveloped, was considered a capital asset. In view of the foregoing, it is the considered opinion of this Office that the income to be derived by Hydee Management 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 2-98, as last amended by RR 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 Tax Code of 1997, as amended by Republic Act ("RA") No. 9337, whichever is higher, of such parcel of land pursuant to Section 27 (D) (5) of the same Code. Moreover, under Section 109 (P) of the Tax Code of 1997, as amended by RA 9337 and as implemented by RR 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 Hydee Management is not primarily engaged in realty business, the above-mentioned parcel of land is not being held by Hydee Management primarily for sale to customers or held for lease in the ordinary course of trade or business. The sale by Hydee Management of the Property shall be exempt from VAT. (BIR Ruling Nos. DA-130-A-2003 dated April 25, 2003, DA-620-2006 dated October 18, 2006 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 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. TCDcSE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service