BIR Ruling No. 496-12

July 31, 2012 BIR RULING NO. 496-12 Sections 2 (g) & 3 of Revenue Regulations No. 07-03 (RR07-03) dated December 27, 2002; Guidelines in the Implementation of Zonal Valuation of Real Properties for RDO No. 43A East Pasig; Sec. 106 (A) (ii) (1) (a), National Internal Revenue Code of 1997, as amended Poblador Bautista & Reyes Law Offices 5th Floor SEDCCO 1 Building, 120 Rada corner Legaspi Streets, Legaspi Village, Makati City 1229 Attention: Atty. Marie Cecile Roque-Quintos and Atty. Meghan De Guia Gentlemen : This refers to your letter, on behalf of your client, ALMAREY HOLDINGS & REALTY CORPORATION, dated 4 May 2011 wherein you requested for a confirmatory ruling that the sale of the Property, while subject to Capital Gains Tax (CGT) and Documentary Stamp Tax (DST),should be exempt from payment of twelve percent (12%) Value-Added Tax (VAT) and that the Property should be classified as a residential property, hence, its zonal valuation should not be increased by twenty percent (20%). TSHcIa It was represented that your client, Almarey Holdings & Realty Corporation was registered with the Securities and Exchange Commission on 20 August 2003 and its principal place of business is in Metro Manila; that the Primary Purpose of Almarey Holdings & Realty Corporation as indicated in its Articles of Incorporation is as follows: " PRIMARY PURPOSE To hold, develop, manage, administer, sell, convey, encumber, purchase, acquire, rent or otherwise deal in all kinds of properties, whether real or personal, including shares of stock or commercial, industrial, urban or other kinds or real property, improved or unimproved, under such terms and conditions as may be permitted by law; to acquire, purchase, hold, manage, develop and sell real property, with or without buildings or improvements, for such consideration and in such manner or form as the corporation may determine or as the law permits; to erect, construct, alter, manage, operate, lease, in whole or in part, buildings and tenements of the corporation or of other persons; and to exercise or undertake such other posers and purposes as may be required and necessarily implied from the purposes herein mentioned; provided that the corporation shall not engage in the business of an open-ended investment company as defined in Republic Act No. 2629 without first complying with the pertinent provisions thereof" (emphasis supplied) It was further represented that the corporation has been operating as a holding company since its incorporation, and as such, has not engaged in any independent or substantial business or activity; and that Almarey Holdings & Realty Corporation did not earn any revenue or income and has, in fact, been incurring losses due to its various administrative expenses for the years 2009 and 2010. It was furthermore represented that in 2005, Almarey Holdings & Realty Corporation acquired a condominium unit located at Unit 10C, Belvedere Tower, San Miguel Avenue, Antonio, Pasig City covered by Condominium Certificate of Title No. PT-42272, and a parking slot, designated as Slot No. 18, Level B-2, covered by Condominium Certificate No. PT-42273; that the condominium unit is not located in the ground floor of the residential condominium; that since the time of acquisition, the Property has remained dormant, idle, unproductive and unimproved; that considering that the office of Almarey Holdings & Realty Corporation is in Makati, it never used the Property in its operations nor was it leased to third parties from the time of its acquisition; and that the property was not held for sale to customers in the ordinary course of its trade or business. TCDHIc It was finally represented that on 11 February 2011, Almarey Holdings & Realty Corporation sold the Property to Nonwoven Fabric Philippines, Inc. and both parties promptly paid the corresponding Documentary Stamp Tax (DST) and Capital Gains Tax due on the transaction; and that BIR Revenue District Office 043A East Pasig City insisted that the transaction should also be subject to the twelve percent (12%) VAT and classified the Property as commercial property, thus, twenty percent (20%) of the established value should be added to its current zonal valuation. In reply, please be informed that Section 3 of Revenue Regulations No. 07-03 (RR07-03) dated December 27, 2002 explicitly provides that all real properties acquired by a real estate dealer, real estate developer, real estate lessor or taxpayer habitually engaged in the real estate business shall be considered as "ordinary assets" .In relation thereto, Section 2 (g) of the said Revenue Regulations, clarified the definition of a taxpayer engaged in the real estate business as follows: aTAEHc "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 ." (emphasis supplied) It is clear from the foregoing that the taxpayer's primary purpose on its Articles of Incorporation determines whether the real property it holds is ordinary or capital asset. The primary purpose of Almarey Holdings & Realty Corporation, as provided for in its Articles of Incorporation, is to hold, develop, manage, administer, sell, convey, encumber, purchase, acquire, rent or otherwise deal in all kinds of properties, whether real or personal. As such, Almarey Holdings & Realty Corporation is deemed engaged in real estate business. Hence, Almarey Holdings & Realty Corporation's condominium unit and parking slot are considered as ordinary assets, subject to creditable withholding tax, value added tax 1 and documentary stamp tax. TADcCS With regard to the additional twenty percent (20%) valuation, the Guidelines in the Implementation of Zonal Valuation of Real Properties for RDO No. 43A East Pasig provides that it is only the ground floor of the residential condominium unit that shall be classified as commercial and twenty percent (20%) of the established value shall be added thereto. As represented, the subject condominium unit is not located at the ground floor, hence an additional twenty percent (20%) is without basis. This Office confirms your opinion that the condominium unit should not be appraised at a value 20% higher than its current zonal valuation. 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 Footnotes 1. Sec. 106 (A) (ii) (1) (a).