BIR Ruling [DA-014-02]

February 4, 2002 BIR RULING [DA-014-02] 22 (B), 27 (A), 196, 57 (B) DA-155-2001 One Asia Development Corporation 2302 The Orient Square Emerald Avenue, Ortigas Center Pasig City Attention: Mr. Ricardo G. Ong Chief Financial Officer Gentlemen : This refers to your letter dated November 6, 2001, stating that your company, One Asia Development Corporation (OADC), a corporation duly organized and existing under and by virtue of the laws of the Philippines entered into a joint venture (JV) agreement with Riviera Land Corporation (RLC), also a corporation duly organized and existing under and by virtue of the laws of the Philippines to undertake the development and sale of six (6) parcels of land registered in the name of RLC, located in Barangay Old Balara, Capitol Hills, Quezon City, with an aggregate area of 20,712 square meters, more or less, and covered by Transfer Certificates of Title Nos. 155938, 155939, 155940, 155941, 155942 and 155943 of the Registry of Deeds for Quezon City; that this project was originally started by Anscor Land Corporation (ASL) and RLC under a JV agreement which was dissolved by the failure of both parties to execute and deliver a Definitive Agreement as called for under the Memorandum of Agreement executed by them; that OADC took over the role of ASL instead; that no separate company has been incorporated for the JV; and that separate books of accounts shall be kept to reflect the business transactions of the JV. Based on the foregoing, you now request for a ruling on the following: "1. Is the unincorporated JV a taxable or non-taxable entity? "2. Are the contributions made by OADC in its capacity as developer and RLC as a contributor of land taxable or non-taxable events? "3. Are the allocation and distribution of the Finished Products to the Parties of the JV (OADC and RLC) at various phases of the project taxable or non-taxable events? and "4. Will each Party to the JV (OADC and RLC) be subject to income tax, VAT withholding requirements and be exclusively liable for such for the sale to the public/third parties of their respective Finished Products?" In reply, please be informed as follows: 1. Pursuant to Section 22(B) of the Tax Code of 1997, the term corporation includes partnership, 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. P.D. No. 929 amended the definition of the taxable corporation as not to include joint venture formed for the purpose of undertaking construction projects. The reasons for such amendment are: (1) Local contractors contribute substantially to the development program of the country; (2) Local contractors are at a disadvantage in competitive bidding with foreign contractors in view of limited capital and financial resources; (3) In order to be able to compete with big foreign contractors, it may be necessary for them to enter into joint ventures to pool their limited resources in undertaking big construction projects; and (4) To assist them in achieving competitiveness with foreign contractors, the joint ventures formed by them should not be considered an additional income tax lien. Considering that it is the intention of the legislature to exclude joint venture or consortium formed for the purpose of undertaking construction projects from the definition of taxable corporation, this Office is of the opinion as it hereby holds that the joint venture entered into by and between the Landowner and the Developer is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. 2. The Owner's assignment to the Developer of its corresponding share of subdivision lots in the aforesaid project is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax, because the allocation is a mere return of capital that each has contributed and therefore, not a taxable event. The transfer is also not subject to VAT, since the transfer is not in the course of business but a capital contribution. 3. However, upon the subsequent disposition by the co-venturers of the areas allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax rate under Section 27(A) of the Tax Code of 1997, and to the creditable withholding tax under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001. Moreover, said sale shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 based on the gross selling price or fair market value of the properties, whichever is higher. Furthermore, the said sale shall likewise be subject to VAT. The Partition Agreement whereby the Landowner and the Developer will allocate unto each other their share in the saleable area in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, income tax and any withholding tax because the allocation is made without monetary consideration and is not in connection with a sale. The partition is made merely to segregate the saleable area between the parties, as the return of the capital which each contributed. However, the acknowledgment to said Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 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, then this ruling will be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Acting Assistant Commissioner Legal Service