BIR Ruling [DA-015-02]

February 4, 2002 BIR RULING [DA-015-02] Atty. Anselmo P . Sinjian III 10/F, DPC Place Building 2322 Chino Roces Avenue Makati City S i r : This refers to your letter dated January 7, 2002 stating that last December 19, 2000, Mancon Berhad-CBDC Joint Venture Corporation (Mancon) entered into a Joint Venture Agreement (JVA) with Rumali Land Corporation (Rumali) for the development of a Farm Estate located at Lipa, Batangas; that by virtue of the JVA, Rumali's contribution will be the land to be developed while that of Mancon will be the development of the property; that for the parties' respective contributions, Rumali will be entitled to 45% and Mancon 55% of the net proceeds from the sales of the parcels of land in the Farm Estate, i.e., gross sales less VAT, creditable withholding tax (retained and remitted by Rumali) and all expenses directly related to the sale transactions; that the parties have decided that the property, after being subdivided into smaller lots, shall remain to be registered in the name of Rumali; that the lots, therefore, shall not be distributed among the partners as their share in the joint venture project; and that Rumali (acting as seller of the lots in the project), after each sale of the lots, shall remit to Mancon its proportionate share in the sale as stated above. Based on the foregoing representations, you now request for a ruling that "1. The above JVA for the Farm Estates Project shall not give rise to a separate taxable joint venture within the meaning of Section 22(b), in relation to Section 27(a) of the Tax Code, of 1997 and therefore, the joint venture partners may file their separate income tax returns on the net revenues derived from the project; and "2. The remittance received by Mancon from Rumali in consequence of sales of the lots in the Project shall no longer be subject to VAT and Creditable Withholding Tax (under Section 57(B) of the Tax Code) since the remittance only represents Mancon's share on sales, transactions already subjected to VAT and Creditable Withholding Tax (taxes retained and remitted to the BIR by Rumali). In reply thereto, please be informed as follows: 1. Section 22(B) of the Tax Code of 1997 provides that 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. It is to be emphasized, however, that P.D. 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; (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 Agreement entered into by and between Mancon and Rumali is not subject to the corporate income tax under Section 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. 2. The allocation and distribution of their respective shares in the project consisting of developed Farm Estates in consideration for their respective contributions to the said agreement is not a taxable event and is not subject to income tax, withholding tax, value-added tax and documentary stamp tax because the allocation is a mere return of capital that each has contributed. Moreover, in the event that any party defer its right to receive a specific allocation to a later phase of the project for as long as such allocation constitutes part of the total return of its capital, such deferment is still not subject to the aforementioned taxes. (BIR Ruling Nos. 207-92 dated July 16, 1992; 349-93 July 30, 1993; DA Ruling No. 025-95 dated January 11, 1995) 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 shall be considered null and void. Very truly yours, (SGD.) MILAGROS V. REGALADO Acting Assistant Commissioner Legal Service