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    SMI-ED Vs CIR

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    Vel June
    The Supreme Court ruled that SMI-ED Philippines was liable for 6% capital gains tax on the sale of its buildings, but not on the sale of its machinery and equipment. [1] The buildings were correctly considered capital assets under the law, but machinery and equipment are not real property and subject to normal corporate income tax instead of capital gains tax. [2] However, SMI-ED Philippines was not ultimately liable for any tax because it reported a net loss for the relevant tax period and was not subject to minimum corporate income tax as a non-operational company. [3]

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    SMI-ED Vs CIR

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    Vel June
    1K views2 pages
    The Supreme Court ruled that SMI-ED Philippines was liable for 6% capital gains tax on the sale of its buildings, but not on the sale of its machinery and equipment. [1] The buildings were correctly considered capital assets under the law, but machinery and equipment are not real property and subject to normal corporate income tax instead of capital gains tax. [2] However, SMI-ED Philippines was not ultimately liable for any tax because it reported a net loss for the relevant tax period and was not subject to minimum corporate income tax as a non-operational company. [3]

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    The Supreme Court ruled that SMI-ED Philippines was liable for 6% capital gains tax on the sale of its buildings, but not on the sale of its machinery and equipment. [1] The buildings were correctly considered capital assets under the law, but machinery and equipment are not real property and subject to normal corporate income tax instead of capital gains tax. [2] However, SMI-ED Philippines was not ultimately liable for any tax because it reported a net loss for the relevant tax period and was not subject to minimum corporate income tax as a non-operational company. [3]

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    1K views2 pages

    SMI-ED Vs CIR

    Uploaded by

    Vel June
    The Supreme Court ruled that SMI-ED Philippines was liable for 6% capital gains tax on the sale of its buildings, but not on the sale of its machinery and equipment. [1] The buildings were correctly considered capital assets under the law, but machinery and equipment are not real property and subject to normal corporate income tax instead of capital gains tax. [2] However, SMI-ED Philippines was not ultimately liable for any tax because it reported a net loss for the relevant tax period and was not subject to minimum corporate income tax as a non-operational company. [3]

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    Title: SMI-ED Philippines Technology, Inc. v. CIR GR No.

    175410 November 12, 2014


    Ponente: J. Leonen

    Doctrine to Remember
    For petitioner’s properties to be subjected to capital gains tax, the properties must form part of
    petitioner’s capital assets under Section 39(A)(1) of NIRC.
    Only the presumed gain from the sale of petitioner’s land and/or building may be subjected to
    the 6% capital gains tax under Sec. 27 (D)(5) of NIRC. The income from the sale of petitioner’s
    machineries and equipment is subject to the provisions on normal corporate income tax.

    Facts
     SMI-Ed Philippines is a PEZA-registered corporation authorized "to engage in the business of
    manufacturing ultra high-density microprocessor unit package." After its registration on June 29,
    1998, SMI-Ed Philippines constructed buildings and purchased machineries and equipment.
     Petitioner "failed to commence operations." Its factory was temporarily closed, effective October 15,
    1999. On August 1, 2000, it sold its buildings and some of its installed machineries and equipment to
    Ibiden Philippines, Inc., another PEZA-registered enterprise. SMI-Ed Philippines was dissolved on
    November 30, 2000. In its quarterly income tax return for year 2000, SMI-Ed Philippines subjected
    the entire gross sales of its properties (buildings, equipment and machineries) to 5% final tax on
    PEZA registered corporations. SMI-Ed Philippines paid taxes amounting to P44,677,500.00.
     On February 2, 2001, after requesting the cancellation of its PEZA registration and amending its
    articles of incorporation to shorten its corporate term, SMI-Ed Philippines filed an administrative claim
    for the refund of P44,677,500.00 with the Bureau of Internal Revenue (BIR). SMIEd Philippines
    alleged that the amount was erroneously paid.
     The BIR did not act on SMI-Ed Philippines’ claim, which prompted the latter to file a petition for review
    before the Court of Tax Appeal.
     CTA Second division denied SMI-ED claim for refund. It held that: 1. fiscal incentives given to PEZA-
    registered enterprises may be availed only by PEZA-registered enterprises that had already
    commenced operations. Since SMI-Ed Philippines had not commenced operations, it was not entitled
    to the incentives of either the income tax holiday or the 5% preferential tax rate. Payment of the 5%
    preferential tax amounting to P44,677,500.00 was erroneous. 2. It found that the properties sold by
    SMI-ED were capital assets under Section 39(A)(1) of the National Internal Revenue Code of 1997,
    hence it subjected the sale of SMIEd Philippines’ assets to 6% capital gains tax. It was found liable
    for capital gains tax amounting to P53,613,000.00.20. Therefore, SMIEd Philippines must still pay the
    balance of P8,935,500.00 as deficiency tax.
     SMI-ED filed a petition for review with the CTA en banc. However, the decision was affirmed.
     Petitioner filed a petition for review before the Supreme Court praying for the grant of its claim for
    refund and the reversal of the Court of Tax Appeals En Banc’s decision arguing that CTA has no
    power to make assessment. Hence, the decision of the CTA where petitioner is to 6% capital gains
    tax is unmeritorious.

    Issues Articles/Law Involved


    Whether or not SMI-ED liable to 6% capital gains Sec. 39 (A)(1) of NIRC
    tax for the sale of buildings, equipment and Sec. 27 (D)(5) of NIRC since the petitioner is a
    machineries? Corporation

    Rulings
    Yes in so far as the sale of buildings is concerned and not to the sale of equipment and machineries.

    For petitioner’s properties to be subjected to capital gains tax, the properties must form part of petitioner’s
    capital assets. The properties involved in this case include petitioner’s buildings, equipment, and
    machineries. They are not among the exclusions enumerated in Section 39(A)(1) of the National Internal
    Revenue Code of 1997. None of the properties were used in petitioner’s trade or ordinary course of
    business because petitioner never commenced operations. They were not part of the inventory. None of
    them were stocks in trade. Based on the definition of capital assets under Section 39 of the National
    Internal Revenue Code of 1997, they are capital assets.

    As regards machineries and equipments, these should not be subjected to the capital gains tax since
    these are not real properties. Only the presumed gain from the sale of petitioner’s land and/or
    building may be subjected to the 6% capital gains tax. The income from the sale of petitioner’s
    machineries and equipment is subject to the provisions on normal corporate income tax.

    Petitioner indicated, however, in its March 1, 2001 income tax return for the 11-month period ending on
    November 30, 2000 that it suffered a net loss of P2,233,464,538.00.69 This declaration was made under
    the pain of perjury. The BIR did not make a deficiency assessment for this declaration. Neither did the
    BIR dispute this statement in its pleadings filed before this court. There is, therefore, no reason todoubt
    the truth that petitioner indeed suffered a net loss in 2000. Since petitioner had not started its operations,
    it was also not subject to the minimum corporate income tax of 2% on gross income. Therefore, petitioner
    is not liable for any income tax.

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