THE type of imposable transaction taxes largely depends on the nature of the asset involved. For instance, for income-tax purposes, sale of capital asset is subject to capital-gains tax, while sale of ordinary asset is subject to the ordinary income tax. That is not, however, always the case. It may also depend on who the seller is.
Sale of real properties classified as real properties is subject to the 6-percent capital-gains tax, regardless of whether the seller is an individual or a juridical entity. However, sale by a corporation of machineries and equipment, though forming part of capital assets, is not subject to this tax. Instead, it is subject to the normal corporate-income tax. This was the pronouncement of the Supreme Court (SC) in G.R. 175410 promulgated in November of 2014.
Sometime in 1998, a Philippine Economic Zone Authority (Peza)- registered entity constructed buildings and purchased machineries and equipment. However, the entity failed to commence operations and its factory was thereafter closed. Hence, it sold its buildings and some of the machineries and equipment installed in the building. On account of the sale, the taxpayer paid the 5-percent final tax applicable to Peza-registered corporations on the entire gross sales.
Realizing that the tax was erroneously paid, the taxpayer applied for refund. The tax court confirmed that the payment of the 5-percent tax was erroneous. However, the claim was not granted, since the properties sold, consisting of buildings and machineries and equipment, were capital assets subject to a 6-percent capital-gains tax. The taxpayer appealed the decision, contending, among others, that the machineries and equipment sold were not subject to the 6-percent capital-gains tax. The SC agreed and made a distinction between individuals and corporate taxpayers insofar as the imposition of capital-gains tax on real properties is concerned.
Before a taxpayer’s property can be subjected to capital-gains tax, the same must form part of the taxpayer’s capital assets. “Capital assets,” as defined under the Tax Code, refers to taxpayer’s property that is not any of the following:
1. Stock in trade;
2. Property that should be included in the taxpayer’s inventory at the close of the taxable year;
3. Property held for sale in the ordinary course of the tax-payer’s business;
4. Depreciable property used in the trade or business; and
5. Real property used in the trade or business.
The properties involved in this case include taxpayer’s buildings, equipment and machineries. They are not among the exclusions enumerated in Section 39(A)(1) of the National Internal Revenue Code (NIRC) of 1997. None of the properties were used in taxpayer’s trade or ordinary course of business because taxpayer never commenced operations. They were not part of the inventory. None of them were stocks in trade. Thus, based on the definition of capital assets under Section 39 of the NIRC of 1997, they are capital assets.
However, corporations and individuals are taxed differently. For individuals, they are liable to capital-gains tax on sale of all real properties in the Philippines classified as capital assets. For corporations, the Tax Code treats the sale of land and buildings, and the sale of machineries and equipment differently. Corporations are subject to the 6-percent capital-gains tax only on the presumed gain realized from the sale of lands and/or buildings only. The tax code does not impose the 6-percent capital-gains tax on the gains realized from the sale of machineries and equipment. Therefore, only the presumed gain from the sale of taxpayer’s land and/or building may be subjected to the 6-percent capital-gains tax. The income from the sale of machineries and equipment is subject to the provisions on normal corporate income tax.
Finally, the Court reiterated its pronouncements in a plethora of cases that the rule in the interpretation of tax laws is that a statute will not be construed as imposing a tax unless it does so clearly, expressly and unambiguously. A tax cannot be imposed without clear and express words for that purpose.
Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication. As burdens, taxes should not be unduly exacted nor assumed beyond the plain meaning of the tax laws.
Reynaldo M. Prudenciado Jr. is a senior tax specialist of Du-Baladad and Associates Law Offices, a member firm of World Tax Services Alliance. The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at reynaldo. prudenciado@bdblaw.com.ph or call 403-2001 local 380.
source: Business Mirror
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