BIR Ruling [DA-011-03]

January 16, 2003 BIR RULING [DA-011-03] 22 (B) DA-065-97 & 027-2002 Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty. J.A. Osana Tax Division Gentlemen : This refers to your letter dated December 11, 2002 requesting in behalf of your client, Federal Land, Inc ., for confirmation of your opinion on the tax consequences of the Memorandum of Agreement (MOA) entered by and between Federal Land, Inc. ("Federal Land"), the Heritage Royale Development Corporation ("Heritage Royale") and Promenade Construction and Development Corporation ("Promenade"). It is represented that Federal Land, a legal entity organized and operating under the laws of the Philippines, with office address at the 7th Floor, Metrobank Plaza, Sen. Gil Puyat Avenue, Makati City entered into a MOA with two other domestic corporations, the Heritage Royale and Promenade; that under the MOA, the three parties, Federal Land, Heritage Royale and Promenade agree that they will jointly participate in the construction of a multi-storey commercial/office condominium building ("Project") on four parcels of land owned respectively by Heritage Royal and Promenade; that the MOA provides for the following terms and conditions: 1. Heritage Royale and Promenade will contribute to the Project for (4) parcels of land represented by Transfer Certificate of Titles Nos. 218287, 181981, 181980 and 181979, all of which are located at Chino Roces Avenue corner Urban Avenue, Makati City; 2. Federal Land will contribute to the Project cash amounting to Php900,000,000.00. The cash will be used to defray the construction of the Project. Federal Land will also shoulder any shortfall in the construction cash requirement, if any; 3. Federal land will be the project coordinator for the construction of the Project; 4. Upon completion of the Project and as a return of the contributions made by the parties, specific whole floors or portions of floors and parking slots in the Project shall be allocated in separate ownership among the parties, in the proportion that their respective contributions to the Project bear the cost of the Project. This will be done through Deeds of Partition specifying the said allocation of the floors or portions of floors and parking slots; DHTECc 5. The parties will then form a condominium corporation that will hold title to, manage, and maintain the land and the common areas pursuant to the provisions of Republic Act No. 4726, otherwise known as the Condominium Act. For this purpose, Heritage Royale and Promenade will execute Deeds of Conveyance of title to the above-mentioned four (4) parcels of land in favor of the condominium corporation, without further monetary contributions. In view of the foregoing, you now request confirmation of your opinions that 1) the MOA to be executed by the parties thereto for the construction of the condominium building in which agreement the parties agreed to contribute parcels of land and cash the subsequent allocation, among themselves, of the ownership of designated floors or parts of floors of the building or parking slots therein, will not create a separate taxable entity within the meaning of Section 22(B) of the Tax Code of 1997; 2) the allocation of specific floors or parts of floors in proportion to the value of the contributions of the parties will not result in any taxable gain subject to income tax and expanded withholding tax since the allocation is a mere return of capital invested by the parties; 3) upon the subsequent disposition of any of the floors or parts of the floors or parking slots allocated to the members of the joint venture, the gain that may be realized from such sale will be subject to the regular income tax under Section 27(A) of the Tax code of 1997, to the creditable withholding tax under Revenue Regulations No. 2-98, to the value-added tax (VAT) under Section 106 and the documentary stamp tax (DST) imposed under Section 196, all of the Tax Code of 1997. 4) The Deed of Conveyance executed by Heritage Royale and Promenade to convey the parcel of land and the common areas to the condominium corporation as well as the Deed of Partition to be executed by the parties allocating and distributing among them their respective shares in the project in exchange for their respective contributions, are without monetary consideration. They merely acknowledge and confirm the title and ownership of the land to the condominium corporation and the allocated shares in the project of the co-joint venturers respectively. As such, neither is subject to the VAT or to the DST respectively imposed under Sections 106, 27(A) as implemented by Revenue Regulations No. 2-98 and 196 all of the Tax Code of 1997. In reply, please be informed as follows: 1) Pursuant to Section 22(B) of the Tax Code of 1997, the term "corporation" shall include partnerships, no matter how created or organized, joint stock companies, joint accounts ( cuentas en participacion ), associations or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. CcAIDa Such being the case, the joint venture that will be formed as a result of the MOA by and between Federal Land, Heritage Royale and Promenade for the construction of a multi-storey commercial/office condominium building is not subject to the corporate income tax under Sec. 27(A) of the Tax Code of 1997. However, the co-venturers are separately subject to the regular corporate income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. Considering the foregoing, the joint venture of Federal Land, Heritage Royale and Promenade for the construction and development of the Project will not create a taxable joint venture within the meaning of Sec. 22(B), in relation to Sec. 27(A) of the Tax Code of 1997. 2) The allocation of their specific floors or units therein and parking slots in the Project in consideration of their contribution in the Project, as stipulated in the MOA, and the issuance of the corresponding condominium Certificate of Title by the Registry of Deeds of Makati City to Federal Land, Heritage Royale and Promenade representing their respective shares or participating interests in the Project as stipulated in the MOA is not a taxable event. The same is therefore, not subject to income, withholding, value-added and documentary stamp taxes. Nonetheless, the acknowledgment to the Deed is subject to documentary stamp tax under Section 188 of the Tax Code of 1997. 3) It is only upon sale or disposition of the units allocated to the Federal Land, Heritage Royale and Promenade to third parties that the gain realized by the parties in the said transaction will be subject to the regular 35% (now 33%) income tax under Sec. 27(A) of the Tax Code of 1997, the creditable withholding tax under Revenue Regulations No. 2-98 and the value-added tax under Section 106 of the Tax Code of 1997. The transfer of the said properties to third parties shall likewise be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 based on the consideration or the fair market value of the property being transferred, whichever is higher. 4) Section 185 of the Revised Documentary Stamp Tax (DST) Regulations No. 26 provides that "conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable." Accordingly, since the aforementioned Deed of Conveyance and Deed of Partition are without consideration and are not in connection with a sale made to Federal Land, Heritage Royale and Promenade and the condominium corporation, respectively, no income was generated and a fortiori , no income, creditable withholding, value-added and documentary taxes are payable and collectible. However, the acknowledgment to said Deed of Conveyance and Deed of Partition are subject to DST of P15.00 pursuant to Section 188 of the Tax Code of 1997. In view thereof, the Deed of Conveyance to be executed by Heritage Royale and Promenade to convey the land to a condominium corporation and pursuant to the Condominium Act and the Deed of Partition whereby Federal Land, Heritage Royale and Promenade allocate unto each other their respective shares in the floors or units and parking slots in the Project, in consideration of their respective contributions in the Project, considering that both are without monetary consideration, will not be subject to income, withholding, value-added and documentary stamp taxes under Section 196 of the Tax Code of 1997. 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, and/or any of the requirements set forth in this letter are not complied with, then this ruling shall be considered null and void. ( BIR Ruling No. DA-065-97 dated February 10, 1997 and BIR Ruling No. DA-027-2002 dated February 26, 2002 ) Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service