Lopez and Co.

December 21, 2018 BIR RULING NO. 1451-18 Sec. 39 (A), Tax Code; BIR Ruling No. 253-16 Lopez and Co. LAC Center 2518 Leiva Street, Sta. Ana City of Manila 1009 Attention: AAA _______________ Gentlemen : This refers to your letter dated June 22, 2018 requesting for a ruling on the following issues: 1) Will the sale transaction described below be exempt from 12% value-added tax (VAT)? 2) As the property is not actually used in business of the Seller, and is the only sale made by the Seller, will the property sold be considered as capital asset and not ordinary asset? 3) As the real property is not part of the Seller's inventory on hand and not held for sale nor held for lease in the ordinary course of trade or business, will the sale be subject to the final tax of 6% and documentary stamp tax (DST) of 1.5% and be exempt from VAT or will the sale be treated as ordinary asset subject to the 5% creditable withholding tax (CWT) and ordinary income tax of 30%? As represented, Spencers Landholdings, Inc . ("Seller") is registered with the Philippines Securities and Exchange Commission (SEC), with SEC Reg. No. AS094000272, on January 12, 1994 primarily to engage in real estate property development. It is a VAT-registered taxpayer with registered office address at LAC Center, 2518 Leiva St., Sta. Ana, Manila. It has not started commercial operation nor generated revenues from the time it was incorporated. From incorporation date onwards, seller did not realize nor generate any revenues. Its statement of comprehensive loss was brought about by its yearly administrative expenses. Its statement of changes in equity showed deficit of P1,584,598 for the year ended December 31, 2017. The Company's Board of Directors sold its real property to Hermano (San) Miguel Febres Cordero Medical Education Foundation, Inc. (De La Salle Medical and Health Sciences Institute) ("Buyer"), which is a non-stock, non-profit corporation, on June 20, 2018. 1 The real property amounting to P15,409,453 as of December 31, 2017 consists of land and property development, and is accounted for as Investment Property per its 2017 Audit Report and not part of property plant and equipment and/or inventory on hand. In addition, the property's planned development did not push through, the said real property was not actually used in business and became idle and therefore not held for sale nor held for lease in the ordinary course of Spencers' trade or business. The Buyer is a tax-exempt entity duly accredited by the Commission on Higher Education (CHED). In reply, please be informed that this Office discussed in BIR Ruling No. 253-16 dated June 22, 2016 how to determine whether an asset is capital or ordinary: ". . . Section 39 (A) of the National Internal Revenue Code (NIRC) of 1997, as amended, provides for the definition of a capital asset, to wit: CAIHTE 'Section 39. Capital Gains and Losses. (A) Definitions. As used in this Title (1) Capital Assets. The term 'capital assets' 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.' The foregoing provision is being implemented by Revenue Regulations (RR) No. 7-2003, issued on February 11, 2003, providing for the guidelines in the determination of whether a particular real property is a capital asset or an ordinary asset. Section 2 (a) of RR 7-2003 defines capital assets as referring to 'all real properties held by a taxpayer, whether or not connected with his trade or business, and which are not included among the real properties considered as ordinary assets under Sec. 39 (A) (1) of the Code.' On the other hand, Section 2 (b) of the same Regulations laid down what constitutes ordinary assets as follows: xxx xxx xxx b. Ordinary assets shall refer to all real properties specifically excluded from the definition of capital assets under Sec. 39(A)(1) of the Code, namely: 1. Stock in trade of a taxpayer or other real 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 2. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or 3. Real property used in trade or business ( i.e. , buildings and/or improvements) of a character which is subject to the allowance for depreciation provided for under Sec. 34(F) of the Code; or 4. Real property used in trade or business of the taxpayer. xxx xxx xxx c. Real property shall have the same meaning attributed to that term under Article 415 of Republic Act No. 386, otherwise known as the "Civil Code of the Philippines." d. Real estate dealer shall refer to any person engaged in the business of buying and selling or exchanging real properties on his own account as a principal and holding himself out as a full or part-time dealer in real estate. e. Real estate developer shall refer to any person engaged in the business of developing real properties into subdivisions, or building houses on subdivided lots, or constructing residential or commercial units, townhouses and other similar units for his own account and offering them for sale or lease. (underscoring supplied) f. Real estate lessor shall refer to any person engaged in the business of leasing or renting real properties on his own account as a principal and holding himself out as lessor of real properties being rented out or offered for rent. g. Taxpayers engaged in the real estate business shall refer collectively to real estate dealers, real estate developers, and/or real estate lessors. Conversely, the term "taxpayers 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. (underscoring supplied) SECTION 3. Guidelines in Determining Whether a Particular Real Property is a Capital Asset or Ordinary Asset. a. Taxpayers engaged in the real estate business. Real property shall be classified with respect to taxpayers engaged in the real estate business as follows: 1. Real Estate Dealer. All real properties acquired by the real estate dealer shall be considered as ordinary assets. (underscoring supplied) 2. Real Estate Developer. All real properties acquired by the real estate developer, whether developed or undeveloped as of the time of acquisition , and all real properties which are field by the real estate developer primarily for sale or for lease to customers in the ordinary course of his trade or business or which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year and all real properties used in the trade or business, whether in the form of land, building, or other improvements, shall be considered as ordinary assets. (underscoring supplied) 3. Real Estate Lessor. All real properties of the real estate lessor, whether land and/or improvements, which are for lease/rent or being offered for lease/rent, or otherwise for use or being used in the trade or business shall likewise be considered as ordinary assets. 4. Taxpayers habitually engaged in the real estate business. 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. Registration with the HLURB or HUDCC as a real estate dealer or developer shall be sufficient for a taxpayer to be considered as habitually engaged in the sale of real estate. If the taxpayer is not registered with the HLURB or HUDCC as a real estate dealer or developer, he/it may nevertheless be deemed to be engaged in the real estate business through the establishment of substantial relevant evidence (such as consummation during the preceding year of at least six (6) taxable real estate sale transactions, regardless of amount; registration as habitually engaged in real estate business with the Local Government Unit or the Bureau of Internal Revenue, etc.).' Based on the above-quoted provisions, it is clear that all real property owned or acquired by a taxpayer engaged in the real estate business are classified as ordinary assets. The classification, therefore, of a particular real property as being capital or ordinary asset does not depend upon its actual use or the purpose for its acquisition, but on the nature of the business of its registered owner . . ." The Articles of Incorporation and Audited Financial Statement as of December 31, 2017 of Spencers Landholdings, Inc. reveal that it is engaged in the real estate business. In as much as the subject property is owned by a corporation engaged in the real estate business, this Office is of the opinion as it hereby holds that the same is classified as ordinary asset. Therefore, its sale shall be subject to the 12% VAT and corresponding CWT. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. See duly notarized Deed of Absolute Sale.