VAT Ruling No. 012-02

March 6, 2002 VAT RULING NO. 012-02 Sec. 4 BIR Ruling 065-97 Pastelero Law Office E-1503-B Philippine Stock Exchange Centre Exchange Road Pasig City Attention: Alvin Jose B. Felizardo Counsel Gentlemen : This refers to your letter, dated March 26, 2001, requesting for confirmation of your opinion that the sale by MGM MOTOR TRADING INC. of its building and the improvements thereon is exempt from value added tax. The facts, as represented, are as follows: MGM MOTOR TRADING INC. (MGM) with Tax Identification No. 002-919-431-000, has its principal office at 80 E. Rodriguez, Jr., Avenue, Libis, Quezon City, and is doing business under the name Nissan Gallery Ortigas. As a corporation, its primary purpose is expressed in its Articles of Incorporation (Annex "A"), to wit: "To engage in, conduct, and carry on the business of buying, selling, distributing, marketing at wholesale and retail insofar as may be permitted by law, all kinds of goods, commodities, wares and merchandise of every kind and description; to enter into all kinds of contracts for the export, import, purchase, acquisition, sale at wholesale or retail and other disposition for its own account as principal or in representative capacity as manufacturer's representative, merchandise broker, indentor, commission merchant, factors or agents, upon consignment of all kinds of goods, wares, merchandise or products whether natural or artificial." Using borrowed funds, MGM caused the construction of a building and other improvements consisting of a showroom, service facilities, parts warehouse and storage of vehicles, on a parcel of land owned by Libra Agro-Industrial Development Corporation, located at E. Rodriguez, Jr., Avenue, Libis, Quezon City. After the completion of aforesaid building, it also introduced leasehold improvements consisting of pavements, fences and other minor improvements. MGM subjected the building and the leasehold improvements to depreciation for a period of thirty (30) years and twenty (20) years, respectively. At present, the Net Book Values of the building and the improvements are as follows: Cost (P.) Accumulated Net Book Value Depreciation (P=) (P) Building & 52,928,869.58 10,025,147.23 42,903,722.35 Improvements Leasehold 1,512,154.54 373,982.29 1,138,172.25 Improvements Total 54,441,024.12 10,399,129.52 44,041,894.60 To pay for its obligations, MGM plans to sell the aforesaid building and the improvements. It is your position that, pursuant to Section 109 (w) of the National Internal Revenue Code of 1997, the contemplated sale is not subject to VAT as said properties are not held primarily for sale to customers or for lease in the ordinary course of trade or business of MGM. In reply, please be informed that this Office agrees that the sale of the building under consideration and the improvements thereon is not subject to value-added tax. Section 4(B)(w) of Revenue Regulations No. 6-97 provides: "SEC. 4. Exemptions . . . . xxx xxx xxx (w) The following sales of real properties are exempt from VAT, namely; (1) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of business." Thus, in BIR Ruling No. 063-97 dated October 6, 1997, this Office ruled: "Inasmuch as the two (2) parcels of land of OUTDOOR are not primarily held for sale to customers or held for lease in the ordinary course of business, then this Office is of the opinion that the sale of the said properties by OUTDOOR in favor of SUNTECH is not subject to the 10% value-added tax (BIR Ruling No. 54-96 dated May 14, 1996; BIR Ruling No. 33-97 dated April 1, 1997)." Accordingly, as the properties under consideration were neither primarily held for sale to customers nor for lease in the ordinary course of business of MGM, the sale thereof is not subject to value-added tax. This ruling is issued on the basis of the foregoing facts as represented. If, upon investigation, it is ascertained that the facts are different, this ruling is considered void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group March 6, 2002 VAT RULING NO. 012-02 Sec. 4 BIR Ruling 065-97 Pastelero Law Office E-1503-B Philippine Stock Exchange Centre Exchange Road Pasig City Attention: Alvin Jose B. Felizardo Counsel Gentlemen : This refers to your letter, dated March 26, 2001, requesting for confirmation of your opinion that the sale by MGM MOTOR TRADING INC. of its building and the improvements thereon is exempt from value added tax. The facts, as represented, are as follows: MGM MOTOR TRADING INC. (MGM) with Tax Identification No. 002-919-431-000, has its principal office at 80 E. Rodriguez, Jr., Avenue, Libis, Quezon City, and is doing business under the name Nissan Gallery Ortigas. As a corporation, its primary purpose is expressed in its Articles of Incorporation (Annex "A"), to wit: "To engage in, conduct, and carry on the business of buying, selling, distributing, marketing at wholesale and retail insofar as may be permitted by law, all kinds of goods, commodities, wares and merchandise of every kind and description; to enter into all kinds of contracts for the export, import, purchase, acquisition, sale at wholesale or retail and other disposition for its own account as principal or in representative capacity as manufacturer's representative, merchandise broker, indentor, commission merchant, factors or agents, upon consignment of all kinds of goods, wares, merchandise or products whether natural or artificial." Using borrowed funds, MGM caused the construction of a building and other improvements consisting of a showroom, service facilities, parts warehouse and storage of vehicles, on a parcel of land owned by Libra Agro-Industrial Development Corporation, located at E. Rodriguez, Jr., Avenue, Libis, Quezon City. After the completion of aforesaid building, it also introduced leasehold improvements consisting of pavements, fences and other minor improvements. MGM subjected the building and the leasehold improvements to depreciation for a period of thirty (30) years and twenty (20) years, respectively. At present, the Net Book Values of the building and the improvements are as follows: Cost (P.) Accumulated Net Book Value Depreciation (P=) (P) Building & 52,928,869.58 10,025,147.23 42,903,722.35 Improvements Leasehold 1,512,154.54 373,982.29 1,138,172.25 Improvements Total 54,441,024.12 10,399,129.52 44,041,894.60 To pay for its obligations, MGM plans to sell the aforesaid building and the improvements. It is your position that, pursuant to Section 109 (w) of the National Internal Revenue Code of 1997, the contemplated sale is not subject to VAT as said properties are not held primarily for sale to customers or for lease in the ordinary course of trade or business of MGM. In reply, please be informed that this Office agrees that the sale of the building under consideration and the improvements thereon is not subject to value-added tax. Section 4(B)(w) of Revenue Regulations No. 6-97 provides: "SEC. 4. Exemptions . . . . xxx xxx xxx (w) The following sales of real properties are exempt from VAT, namely; (1) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of business." Thus, in BIR Ruling No. 063-97 dated October 6, 1997, this Office ruled: "Inasmuch as the two (2) parcels of land of OUTDOOR are not primarily held for sale to customers or held for lease in the ordinary course of business, then this Office is of the opinion that the sale of the said properties by OUTDOOR in favor of SUNTECH is not subject to the 10% value-added tax (BIR Ruling No. 54-96 dated May 14, 1996; BIR Ruling No. 33-97 dated April 1, 1997)." Accordingly, as the properties under consideration were neither primarily held for sale to customers nor for lease in the ordinary course of business of MGM, the sale thereof is not subject to value-added tax. This ruling is issued on the basis of the foregoing facts as represented. If, upon investigation, it is ascertained that the facts are different, this ruling is considered void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group