BIR Ruling No. 215-11

July 6, 2011 BIR RULING NO. 215-11 Sec. 106, Tax Code of 1997; RR 7-2003 Puregold Properties, Inc. 900 D. Romualdez St., Paco, Manila Attention: Mr. Leonardo B. Dayao Vice-President Gentlemen : This refers to the letter from East Coast Properties & Holdings Corporation dated July 26, 2010 requesting, on behalf of PUREGOLD PROPERTIES, INC., exemption from Value-Added Tax (VAT) on the sale of its real properties. ITHADC Documents submitted disclose that PUREGOLD PROPERTIES, INC. (TIN: 003-867-624-000) is a corporation duly organized and existing under the laws of the Philippines with principal office address at 900 D. Romualdez St., Paco, Manila; that it is registered with the Securities and Exchange Commission (SEC) under SEC Registration No. AS094-003468 dated April 15, 1994; that it is engaged in the business as a real estate developer as indicated in its primary purpose of incorporation; that in the course of its operation, it had acquired in 1996, the following parcels of vacant lots intended for its Puregold Supermart sites: (1) TCT No. 205847 with an area of 358 sq.m., (2) TCT No. 205847 with an area of 172 sq.m., (3) TCT No. 205869 with an area of 236 sq.m., and (4) TCT No. 205870 with an area of 226 sq.m. or a total area of 992.00 sq.m. all located at Gen. Luna St., cor. Mercado St., Brgy. Poblacion, Makati City; that said lots remained idle to date; that due to the failure of the corporation to buy the adjoining properties and inadequacy in area for the purpose it was intended, PUREGOLD PROPERTIES, INC. is constrained to re-sell the lots; and that in connection with the proposed sale by PUREGOLD PROPERTIES, INC., you are requesting exemption from VAT based on Section 3 (e) of Revenue Regulations (RR) No. 7-2003. In reply, please be informed that RR 7-2003 defines a real estate developer as follows: "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." There is no dispute that Puregold Properties, Inc. is engaged in the business as a real estate developer which is shown by its Articles of Incorporation and financial activities. In relation with this, Section 3 (a) of the same Regulations provides: "SEC. 3. Guidelines in Determining Whether a Particular Real Property is a Capital Asset or Ordinary Asset. xxx xxx xxx 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. . . . 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 held 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." Hence, all real properties acquired by Puregold Properties, Inc. are considered as ordinary assets. Puregold Properties, Inc. relies on the provision under Section 3 (e) of RR 7-2003 which provision states, viz. : "e. Treatment of abandoned and idle real properties. Real properties formerly forming part of the stock in trade of a taxpayer engaged in the real estate business, or formerly being used in the trade or business of a taxpayer engaged or not engaged in the real estate business, which were later on abandoned and became idle, shall continue to be treated as ordinary assets. Real property initially acquired by a taxpayer engaged in the real estate business shall not result in its conversion into a capital asset even if the same is subsequently abandoned or becomes idle. Provided however, that properties classified as ordinary assets for being used in business by a taxpayer engaged in business other than real estate business as defined in Section 2(g) hereof are automatically converted into capital assets upon showing of proof that the same have not been used in business for more than two (2) years prior to the consummation of the taxable transactions involving said properties. " (Emphasis supplied) cSaCDT The second paragraph of 3 (e) refers to the automatic conversion of ordinary assets used in business by a taxpayer "engaged in business other than real estate business" when there is proof that the same has not been used in business for more than 2 years. The foregoing provision does not apply in the case of Puregold Properties, Inc. since Puregold Properties, Inc. is a real estate developer. Moreover, the Regulations made it clear that: "A property purchased for future use in the business, even though this purpose is later thwarted by circumstances beyond the taxpayer's control, does not lose its character as an ordinary asset. Nor does a mere discontinuance of the active use of the property change its character previously established as a business property." Hence, the four (4) properties that were previously acquired for future use in business are considered "ordinary assets" and although they were not actually utilized due to insufficient the area for which they were intended, do not lose their character as such. IN VIEW OF THE FOREGOING, this Office is of the opinion that the real properties covered by TCT No. 205847, TCT No. 205847, TCT No. 205869, and TCT No. 205870 with a total area of 992.00 sq.m., are still considered ordinary assets of Puregold Properties, Inc. and hence, are subject to VAT and expanded withholding tax under Section 2.57.2 (J) of RR 2-98, as amended, based on the gross selling price or current fair market value as determined in accordance with Section 6 (E) of the Code, whichever is higher, and consequently to ordinary income tax imposed under Section 27 (A) of the same Tax Code. Your request for confirmation that the sale of the aforementioned properties cannot be granted for lack of legal basis. 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 as represented are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue