VAT Ruling No. 072-99

July 27, 1999 VAT RULING NO. 072-99 109 VAT Ruling 021-98 072-99 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Mr . Joel L . Tan Torres Partner, Tax Division Gentlemen : This refers to your letter dated April 29, 1999 requesting confirmation that the transfer of vacant and undeveloped real properties to creditor banks by means of dacion en pago is exempt from the 10% value-added tax (VAT) but subject to 6% capital gains tax and 1.5% documentary stamp tax. It is represented that your client, Metroland Properties and Management Corporation ("MPMC" for brevity) is a domestic corporation engaged, among others, in the property leasing business; that as of this date, the only property that it has developed and used in the ordinary course of trade and business is a commercial building lot, which it is presently leasing to a retail company; that MPMC also owns several parcels of vacant and undeveloped lands, which are not used in the ordinary course of trade or business; that the said parcels of land were used as collateral for MPMC's outstanding loans with several banks; that MPMC and a number of these creditor banks have come to an agreement to settle MPMC's obligations by means of dacion en pago , with the banks acquiring the parcels of land that are mortgaged to them, hence, this request. prcd In reply, please be informed that the Tax Code, as amended, provides as follows: "SEC. 109. Exempt Transactions . The following shall be exempt from the value-added tax: xxx xxx xxx (w) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business . . ." xxx xxx xxx "SEC. 27. Rates of Income Tax on Domestic Corporation . xxx xxx xxx (D) Rates of Tax on Certain Passive Incomes . xxx xxx xxx (5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings . A final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of the corporation and are treated as capital assets, based on the gross selling price or fair market value as determined in accordance with Section 6 (E) of this Code, which ever is higher, of such lands and/or buildings. xxx xxx xxx" "SEC. 196. Stamp Tax on Deeds of Sale and Conveyance of Real Property . On all conveyance, deeds, instruments, or writings, other than grants, patents or original certificates of adjudication issued by the Government, whereby any land, tenement or other realty sold shall be granted, assigned, transferred or otherwise conveyed to the purchaser, or purchasers, or to any other person or persons designated by such purchaser or purchasers, there shall be collected a documentary stamp tax, at the rates herein below prescribed, based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6(E) of this Code, whichever is higher: Provided, That when one of the contracting parties is the Government, the tax herein imposed shall be based on actual consideration. (a) . . . (b) For each additional One thousand pesos (P1,000), or fractional part thereof in excess of One thousand pesos (P1,000) of such consideration or value, Fifteen pesos (P15.00). xxx xxx xxx" Inasmuch as the real properties are not being offered for sale or for lease to customers, the same can be considered as real properties not primarily held for sale or for lease. Moreover, the said properties, being vacant and not yet subject of development, are properly considered as not actually used in the business of MPMC, and classified as capital assets (VAT Ruling No. 021-98, dated August 5, 1998; BIR Ruling No. 54-96 dated May 14, 1996; and BIR Ruling No. 33-97 dated April 1, 1997). Accordingly, your opinion that the transfer of said real properties to the creditor banks by means of dacion en pago is exempt from the 10% VAT but subject to the final 6% capital gains tax and 1.5% (P15 for every P1,000) documentary. stamp tax based on the consideration contracted to be paid or on its fair market value, whichever is higher, is hereby, confirmed. This ruling is being issued based on the foregoing representation. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Local & Enforcement Group)