September 19, 2006

BIR RULING [DA-560-06]

27 (D) (5); DA 270-04

Atty. Rommel M. Santiago & Associates

Unit 1802 18/F The Peak Condominium
L.P. Leviste Street, Salcedo Village
Makati City

Gentlemen :

This refers to your letter dated July 10, 2006 stating that LABAL REALTY
DEVELOPMENT, INC. (Labal) is a corporation duly organized and existing under
the laws of the Philippines and was incorporated on January 3, 1990; that since
Labal's incorporation it has managed several properties not part of its inventory and
leased properties that are part of its inventory; that Labal did not undertake any
development on its real properties that are part of its inventory; that sometime in
October 1990, Labal purchased a vacant property located in Pasig City covered by
TCT No. PT-80475; that said property is a vacant and/or idle land which was never
used by Labal in its trade or business and is classified as a capital asset in its financial
statement; and that said property was never subjected to depreciation, nor included in
the stock in trade or inventory, nor held primarily for sale or lease to customers in the
ordinary course of its trade or business, and was never leased out since its acquisition.

In connection therewith, you now request confirmation of your opinion that the
sale of the above-mentioned real property, being a capital asset, is subject to capital
gains tax and is not subject to value-added tax (VAT).

In reply thereto, please be informed that whenever a real estate developer sells
real properties forming part of its inventory for sale or lease to customers, it is
considered as a sale of ordinary assets subject to the 32% income tax pursuant to
Section 27(A) of the Tax Code of 1997. However, when the real estate involved has
never formed part of its inventory for sale to customers and has not been used in its
trade or business as evidenced by the fact that it has remained idle, raw and
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 undeveloped, such real properties are properly classified as capital assets subject to a
final tax of 6% on the gain presumed to have been realized from the sale or transfer
thereof pursuant to Section 27(D)(5) of the Tax Code of 1997.

The character of the real property involved in a transaction must primarily be

determined, i.e., whether or not it is capital or ordinary asset, prior to the application
of the appropriate tax rates. Under Section 39(A)(1) of the Tax Code of 1997, the term
"capital assets" is negatively defined as property held by the taxpayer (whether or not
connected with his trade or business) but does not include (i) stock in trade of the
taxpayer or other property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year, or (ii) property
held by the taxpayer primarily for sale to customers in the ordinary course of his trade
or business; or (iii) 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
(iv) real property used in trade or business of the taxpayer. (BIR Ruling No. 027-02
dated July 3, 2002) EIcTAD

Thus, if the real property is a land or building which is not actually used in the
business of the seller-corporation and is treated as a capital asset, as the term is
defined in Section 39(A) of the Tax Code of 1997, then a final tax of six percent (6%)
shall be imposed on the gain presumed to have been realized on its sale, exchange or
disposition of such land or building based on the gross selling price of or fair market
value as determined in accordance with Section 6(E) of the Tax Code of 1997,
whichever is higher. This rule applies, whether or not the seller corporation is engaged
in real estate business. On the other hand, it is only when the real property being sold
is an ordinary asset that the withholding tax rates imposed under Section 2.57.2 of
Revenue Regulations No. 2-98, as amended, shall apply. The rate of withholding tax
will depend on whether, first, the seller is exempt or taxable, second, whether the
seller is habitually engaged in real estate business or not; and third, if the seller is
habitually engaged in real estate business, the gross selling price, as that term is
defined in the above-mentioned Revenue Regulations. (BIR Ruling DA152-04 dated
March 31, 2004 citing BIR Ruling No. 27-02 dated July 3, 2002)

When real property, which is idle and vacant, had not been used in the ordinary
course of trade or business nor had it ever been classified as property of a kind which
would properly be included in the inventory if on hand at the close of the taxable year,
nor had it ever been held by the taxpayer primarily for sale to customers in the
ordinary course of trade or business, the income derived from the sale thereof is not
subject to the expanded withholding tax under Section 2.57.2(J) of Revenue
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 Regulations No. 2-98, but only to the 6% capital gains tax imposed under Section
27(D)(5) of the Tax Code of 1997 and to the documentary stamp tax under Section
196 of the same Code, based on the gross selling price or fair market value (FMV) as
determined in accordance with Section 6(E) of the Code, whichever is higher. Lots or
improvements, classified as "investment properties", which are idle, unproductive and
unimproved since the time of acquisition, and do not fall under any of the assets
enumerated under Section 39(A)(1) of the Tax Code of 1997 and 2(b) of Revenue
Regulations No. 7-2003 are classified as capital assets, the sale of which is subject to
6% capital gains tax, DST of 1.5% but exempt from 10% VAT. (BIR Ruling No.
DA152-04 dated March 31, 2004)

Based on your representation, since the property of Labal is vacant and had not
been used in the ordinary course of trade or business nor had it ever been classified as
property of a kind which would properly be included in the inventory if on hand at the
close of the taxable year nor had it ever been held by the taxpayer primarily for sale to
customers in the ordinary course of trade or business, the income derived from the
sale thereof is not subject to the expanded withholding tax under Section 2.57.2 (J) of
Revenue Regulations No. 2-98, but only to the 6% capital gains tax imposed under
Section 196 of the same Code, based on the gross selling price or FMV as determined
in accordance with Section 6(E) of the Code, whichever is higher. (BIR Ruling No.
DA217-99 dated April 12, 1999; DAO10-02 dated January 29, 2002 and DA152-04
dated March 31, 2004)

Corollarily, only such real properties held by a real estate developer primarily
for sale or Lease to customers in the ordinary course of its real estate development
business, or which would be properly included in the inventory of such taxpayer if on
hand at the close of the taxable year, or used in his trade or business are appropriately
classified as ordinary assets. Otherwise stated, real properties of a real estate
developer other than those enumerated under Section 39(A)(1) of the Tax Code of
1997 and Section 2(b) of Revenue Regulations No. 7-2003 are properly deemed as
capital assets.

Considering that the registered property classified in Labal's books as

investment in real estate remains vacant and unproductive since the time of
acquisition, and does not fall under any of the assets enumerated under Sections
39(A)(1) of the Tax Code of 1997 and Section 2(b) of Revenue Regulations No.
7-2003, the same should be properly classified as capital asset for tax purposes. STcDIE

Accordingly, we hereby confirm your opinion that the sale of Labal's real

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 property which is classified as "investment properties" in its books and considered as
capital assets is:

(1) subject to the capital gains tax of 6% pursuant to Section 27(D)(5) of the
Tax Code of 1997;

(2) subject to DST at the rate of P15.00 for each P1,000.00 or fractional
part thereof in excess of P1,000.00, or 1.5% of the consideration or fair
market value of the properties, whichever is higher, pursuant to Section
196 of the Tax Code of 1997; and

(3) exempt from 10% VAT, pursuant to Section 109(w), supra, as amended
by R.A. No. 9337, as implemented by Revenue Regulations No.
16-2005. (BIR Ruling No. DA270-04 dated May 17, 2004)

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.

Very truly yours,

(SGD.) JAMES H. ROLDAN

Assistant Commissioner
Legal Service
Bureau of Internal Revenue

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