BIR Ruling No. 698-2020

REPUBLIC OF THE PHILIPPINES

DEPARTMENT OF FINANCE BUREAU OF INTERNAL REVENUE

Quezon City

27D5;39(A1;RR No.7-2003 BIR Ruling No. 014-03; BIR Ruling No: 634-17;

BIR Ruling No. 480-17;

BIR Ruling No. 187-17;

VAT-0404-2020

OT-

DEC 2_9 2020

PHILIPPINE AIRLINES,INC. PNB Financial Center

Pres, Diosdado Macapagal Ave. CCP Complex, Pasay City

Attention: Mr. Gilbert F. Santa Maria

President & CEO

Gentlemen:

This refers to your letter dated October 23, 2020 requesting for confirmation that the sale

of real properties owned by Philippine Airlines, Inc. ("PAL for brevity) and being held for

investment purposes is subject to the 6% capital gains tax (CGT) and the documentary stamp tax

(DST) on conveyance of real property and exempt from the value-added tax (VAT).

Background:

PAL is a domestic corporation duly registered with the Securities and Exchange

Commission (SEC) with Company Reg. No. It was also registered with the Bureau

of Internal Revenue (BIR) with TIN No. under Line of Business Nos. : as

international air passenger transport and as domestic air passenger transport.

The purposes for which PAL was formed are "to engage in transport services for the

transportation of passengers, express parcels, mail merchandise and freight by air, and all other

services of a similar character which may from time to time be deemed advisable, to establish,

purchase, own, acquire, operate and generally turn to account, airlines, operates aerial taxi, aerial

advertising and sightseeing services, to own, purchase, construct, lease, operate and dispose of

airports, hangars, transportation depots; caircraft service stations and agencies, and other objects

and service of a similar nature which may be necessary, convenient or useful as an auxiliary to its

transportation service, to service and repair aircraft and generally deal in all kinds of airplanes,

seaplanes, oil, fuel, aircraft accessories and equipment and goods, wares and merchandise

necessary for its transportation service, and to purchase, rent or otherwise acquire, to hold, own,

Sections 27(D)(5): 39(A)(1); RR 7-2003 Philippine Airlines, Inc. OT-698-20- DEC 2 9 2020

A

mortgage, pledge, assign, transfer, lease or otherwise encumber or dispose of any property, right.

or interest which may be in any way connected with or useful to the business conducted by the Corporation, to borrow and lend money in aid of the Company's corporate purposes, and for such

purposes, to issue, receive and hold bonds, notes and other obligations; to appoint subject at all times to the supervision and control of'the Board of Directors, a manager or managers, to attend to the proper conduct of the business of the corporation, and further to engage in all other acts and

business which may be necessary or convenient in the furtheranice of the air transportation

. business, including but not limited to the imanagement of operations of, or investment in hotels,

restaurants, cafes and amusement enterprises of all kinds and generally dealing in and with all

facilities and appurtenances .desirable or appropriate in the conduct of the foregoing activities"

PAL is the registered owner of six (6) parcels of land without any improvements

constructed thereon, all located in Barangay Yapak, Municipality of Malay, Province of Aklan,

(hereinafter referred to as the "Subject Properties") which are specifically described, as follows:

Transfer Certificate Tax Declaration Nos. Arga (in Sqm.) Classification

of Title Nos.

115,611 17,470 1,412 Agricultural Agricultural Residential

6,238 Agricultural

23,312 5,166 Agricultural Agricultural

The Subject Properties were lodged under "Non-current Assets" caption of PAL's Audited

Financial Statement with the account title "Investment Properties". The Subject Properties remain

idle and undeveloped and were never used in trade or business by PAL.

On August 25, 2020, a Contract to Sell was executed between PAL, as the Vendor, and

Golden TW Realty & Development Corporation, as the Vendee, whereby the latter offered to

purchase from the Vendor the Subject Properties on an "as is where is basis", and the Vendor

accepted such offer to purchase.

The issue is whether or not the Subject Properties are capital assets of PAL.

In reply, please be informed that the term "capital asset" as negatively defined in Section

39(A)(1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, 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 properly be 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.

Sections 27(D)(5); 39(A)(1); RR 7-2003 Philippine Airlines, Inc. OT-698-Z0.20 2020

3

(RR) No. 7-2003, particularly Section 3(e) thereof, provides to wit: An idle property may be classified as capital asset or ordinary asset. Revenue Regulations

PARTICULAR REAL PROPERTY IS A CAPITAL ASSET OR ORDINARY ASSET. "SEC.3. GUIDELINES IN DETERMINING WHETHER A

XXX XXX XXX

Treatment of abandoned and idle real properties. -- Real properties formerly forming part of the stock in trade of a taxpayer engaged in the real estate business, or formerly being used in the trade or business of a taxpayer engaged

became idle, shall continue to be treated as ordinary assets. Real property result in its conversion into a capital asset even if the same is subsequently or not engaged in the real estate business, which were later on abandoned and initially acquired by a taxpayer engaged in the real estate business shall not abandoned or becomes idle.

Provided however, that properties classified as ordinary assets for being used

as defined in Section 2(g) hereof are automatically converted into capital assets in business by a taxpayer engaged in business other than real estate business

upon showing of proof that the same have not been used in business for more

than two (2) years prior to the consummation of the taxable transactions

involving said properties. (Emphasis supplied)

Based on the above, an idle property classified as ordinary asset is automatically converted

into capital asset upon showing of proof that the same has not been used in business for more than

two (2) years prior to the consummation of the taxable transaction involving said properties. The

automatic conversion of property into capital asset provided in RR No. 7-2003, however, is not necessary when the idle real property is considered capital asset from the moment it was acquired. The Subject Properties were registered in the name of PAL in 2017 and were acquired for

investment purposes and recorded by PAL as capital assets. The properties were never used in the course of trade or business of PAL, or depreciated for that purposes. No improvements were introduced to the Subject Properties as certified by the Provincial Assessor's Office of the Province

of Aklan and Barangay Chairman of Barangay Yapak, Municipality of Malay; Province of Aklan.

More importantly, PAL is engaged in air transportation of passengers and cargoes and not in the

real estate business.

In view of the foregoing, and considering that PAL is a taxpayer not engaged in the real

estate business, being not a real estate dealer, developer or lessor and was organized as an airline

company; that the Subject Properties have been idle and vacant (for more than two years) as shown,

aside from the pictures submitted, by the Certifications of the Provincial Assessor's Office of the

Province of Aklan and Barangay Chairman of Barangay Yapak, Municipality of Malay, Province

of Aklan that there are no improvements nor structures erected on the Subject Properties; and that

the Subject Properties have been treated in the books of accounts and are reflected in the audited

0

Sections 27{D)5; 39(A)1); RR 7-2003 Philippine Airlines, Inc. DT-698-2020 DEC. 2 9 2020

financial statement as investment properties and have not been used in the ordinary course of trade or business, it is the considered opinion of this Office that the Subject Properties described above are classified as capital assets, the conveyance of which is subject only to the CGT under Section to VAT under Section 106 of the same Code (BIR Ruling Nos. 187-2017 dated April 1.7, 2017; 27(D)(5) of the Tax Code and DST under Section 196 of the same Code, and shall not be subject 634-2017 dated December 19, 2017 and 480-2017 dated October:18, 2017; VAT-0404-2020 dated July 23,2020)

upon investigation, it will be disclosed that the facts are different, then this ruling shall be This ruling is being issued on the basis of the foregoing facts as represented. However, if

considered null and void.

Very truly yours,

1ae3oulwe

CAESAR R. DULAY

Commissioner of Internal Revenue

038958

K-1 gps (PAL)