Infinity Star Mdsg Corp.

January 22, 2009 BIR RULING [SH-(002) 029-09] Infinity Star Mdsg Corp. 20-C Kabignayan St.,Quezon City Attention: Mr. Gregorio N. Chua President Gentlemen : This refers to your letter requesting, in effect, for confirmation of your opinion as follows: ACcDEa 1) The sale of real properties by Infinity Star Merchandise Corporation ("Infinity Star"), utilized for socialized housing project in accordance with Republic Act No. 7279, otherwise known as the "Urban and Development Housing Act of 1992", through the Community Mortgage Program of the Social Housing Finance Corporation (SHFC), is exempt from the payment of value-added tax (VAT); 2) As the above sale of real properties utilized for social housing project is exempt from the capital gains tax, it is likewise exempt from the 35% corporate income tax; and 3) That for financial reporting purposes, and in accordance with the Philippine Accounting Standards (PAS) and Philippine Financial Reporting Standards (PFRS),the said sale of real properties utilized for socialized housing project although exempted from income tax is still required to be reported in the financial statements of the taxpayer. It is represented that on several occasions, the BIR has issued rulings in favor of Infinity Star exempting its sale of four (4) parcels of land, on different occasions, utilized for socialized housing project through the CMP, from the payment of capital gains tax. The rulings issued with the corresponding properties and CMP projects covered are as follows: 1) BIR Ruling No. S-20-001-2008, dated January 9, 2008 TCT No. T-486446 sold to the St. Nazarene Homeowner's Association, Inc.,Phase II; 2) BIR Ruling No. S-20-002-2008, dated January 9, 2008 TCT No. T-486445 sold to the St. Nazarene Homeowner's Association, Inc.,Phase I; 3) BIR Ruling No. SH (001) 008-2008, dated July 9, 2008 TCT No. T-486448 sold to the St. Nazarene Homeowner's Association, Inc.,Phase 4; and 4) BIR Ruling No. SH (002) 009-2008, dated July 9, 2008 TCT No. T-486447 (M) sold to the St. Nazarene Homeowner's Association, Jr.,Phase 3. cAECST However, upon presentation of the rulings and the supporting documents to the Revenue District Office (RDO) concerned, you were informed that the transfer of titles of the above subject properties to the homeowners association is still subject to income tax and to VAT. Allegedly, the reason for such assessment is the inclusion by Infinity Star of the amount realized from the above exempt transactions in its financial reports, thus, creating the assumption by the examiner that the assets involved are ordinary assets of Infinity Star. Hence, this request for a confirmatory ruling. In reply thereto, please be informed as follows: A perusal of the dockets to where the above-mentioned rulings were based showed that the four (4) parcels of land owned by Infinity Star were classified as residential property and that prior to their sale, the same were already occupied by the informal settlers, who are beneficiaries of the Community Mortgage Program of the SHFC. As such and for purposes of taxation, the above subject properties were properly classified as capital assets of Infinity Star thereby the above rulings providing for the exemption from the payment of the capital gains tax on the transfer of titles of the subject properties to the corresponding homeowners associations, are proper. The classification of the assets of Infinity Star as capital assets is in accordance with Section 39 (A) (1) of the Tax Code of 1997, as amended, which provides as follows: "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 be properly 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." Infinity Star is not engaged in realty business, thus, the above real properties were not part of its inventory of properties for sale or stock in trade. Neither said properties were used by Infinity Star as the same were already occupied by the informal settlers. Granting arguendo that the assets involved herein are classified as ordinary assets, the transfer of the same is still exempt from income tax. Pertinent portion of Section 32 of R.A. No. 7279, 1 reads as follows: DEHaTC "Sec. 12. Incentives. To encourage its wider implementation, participants in the CMP shall be granted with the following privileges or incentives: xxx xxx xxx (b) Properties sold under the CMP shall be exempted from the capital gains tax and expanded withholding tax if sold by an individual, estate, or trust, or ordinary corporate income tax and expanded withholding tax if sold by a corporation ....." (Emphasis supplied) The mere inclusion by Infinity Star of the amount realized from the above exempt transactions in its financial reports does not make such income subject to the corporate income tax. Under Section E of Form No. 1702, a reconciliation of the net income per books against the taxable income is required to be made in order to separate those income exempt from taxes or those already subjected to final taxes from those subject to the regular income tax. On the other hand, as to the issue on whether the sale by Infinity Star of properties utilized for socialized housing project is exempt from VAT, this Office has the considered opinion that since the real properties involved are treated as capital assets of Infinity Star, it is therefore not subject to VAT imposed under Section 106 of the Tax Code of 1997, as amended. This is so because the above sale of realties by Infinity Star was not made by it in the regular conduct or pursuit of a commercial or economic activity. Neither the said sale of realties by Infinity Star, incidental to its purposes. Moreover, Section 109 (P) of the Tax Code of 1997, as amended, provides as follows: "Section 109. Exempt Transactions . (1) Subject to the provisions of subsection (2) hereof the following transactions shall be exempt from the value-added tax: xxx xxx xxx "(P) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, ...." [Emphasis supplied] CDaTAI Implementing the above provision of the 1997 Tax Code, as amended by RA No. 9337, Section 4.109-1 (B) (1) (p) (3) of RR No. 16-2005, as amended, states that: "Section 4.109-1. VAT-Exempt Transactions . (A) In general. "VAT-exempt transactions" refer to the sale of goods or properties and/or services and the use or lease of properties that is not subject to VAT (output tax) and the seller is not allowed any tax credit of VAT (input tax) on purchases. xxx xxx xxx (B) Exempt transactions . (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from VAT: xxx xxx xxx (p) The following sales of real properties are exempt from VAT, namely: xxx xxx xxx (3) Sale of real properties utilized for socialized housing as defined under RA No. 7279, and other related laws, such as RA No. 7835 and RA No. 8763, wherein the price ceiling per unit is P225,000.00 or as may from time to time be determined by the HUDCC and the NEDA and other related laws ....." [Emphasis supplied] Clearly, the above-quoted provision of the 1997 Tax Code, as amended, as implemented by RR No. 16-2005, as amended, allows for the VAT-exempt sale of real properties utilized for socialized housing. Accordingly, since the realties sold by Infinity Star were utilized for socialized housing, the said sale therefore is exempt from VAT imposed under Section 106 of the Tax Code of 1997, as amended. (BIR Ruling No. DA-461-06 dated July 28, 2006) 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. ISCaTE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. Section 4 (C) of Revenue Regulations No. 11-97, as amended by *