BIR Ruling [DA-019-01]

February 15, 2001 BIR RULING [DA-019-01] Joint Venture DA-079-99 2-8-99 First MCE Resources Corporation Suite 1917 Cityland Office Condominium 10, Tower I Fr. Horacio V. dela Costa St., near Ayala Avenue Salcedo Village, Makati City Attention: Mr . Manuel C . Evangelista President Gentlemen : This refers to your letter dated May 15, 2000 requesting for a ruling on the tax consequences of the Land Development Agreement executed by and between Silvestre T . Medina, Cornelia Medina-Tirona, Rosario Medina, Jesus T . Medina, and Corazon Medina-Reyes (hereinafter referred to as the LANDOWNERS), and First MCE Resources Corporation (hereinafter referred to as First MCE ) for the development of the LANDOWNERS' parcel of land. It is represented that First MCE is a domestic corporation engaged in the business of acquiring, developing and selling real estate for residential and commercial purposes; that the LANDOWNERS are the absolute owners of a parcel of land located at Bo. San Dionisio, Paraaque, Metro Manila covered by Transfer Certificate of Title No. S-14935 with an area of TWENTY FOUR THOUSAND FOUR HUNDRED AND FORTY FIVE (24,445) SQUARE METERS, more or less; that on June 29, 1990, a Land Development Agreement was executed by and between First MCE and the LANDOWNERS for the development of the subject real property; that under the Agreement, the LANDOWNERS shall contribute real property and First MCE shall develop, at its own expense, the parcel of real property of the LANDOWNERS; that as part of First MCE's responsibility under the Agreement, it shall fill up and develop, an approximately one-hectare abandoned river bed that surrounds the titled property; that First MCE shall likewise undertake the application for titling of the abandoned river bed; that after securing the approval of the government agencies, the area of the abandoned river bed totalling 11,828 square meters shall form part of the property of the joint venture with a total area of FOUR THOUSAND SEVENTY SIX SQUARE METERS AND POINT EIGHT (4,076.80), subdivided into: 1. Lot 2-A-1, Psd-00-446849 = 1,000.00 sqm. (Share of First MCE) 2. Lot 2-A-2, Psd-00-046849 = 1,000.00 sqm. '" 3. Lot 2-A-3, Psd-00-046849 = 1,249.00 sqm. '" 4. Lot 2-A-4, Psd-00-046849 = 529.00 sqm. '" 5. Lot 2-C, Psd-00-046254 = 298.80 sqm. '" SUB-TOTAL = 4,076.80 sqm. 6. Lot 2-B, Psd-00-046254 = 180.00 sqm., TCT #131434 (Road given to the Mun. Paraaque) 7. Lot 2-D, Psd-00-046254 = 7,571.20 sqm., TCT #131435 (Share of the Landowners) GRAND TOTAL = 11,828.00 sqm. Based on the foregoing representations, you now request for a ruling that 1. The Land Development Agreement executed by and between the LANDOWNERS and First MCE for the development of the LANDOWNERS' parcel of land will not create a taxable joint venture within the meaning of Section 22(B), in relation to Section 27(A) of the Tax Code of 1997; and 2. The allocation of the designated lots and as a consequence thereof, the execution of the respective DEEDS OF ASSIGNMENT conveying without monetary consideration the designated lots representing their respective share in the project as stipulated in the Land Development Agreement between First MCE and the landowners is not a taxable event, therefore, not subject to income tax, withholding tax, value added tax and documentary stamp tax because it is only upon the sale or disposition of the lots allocated to First MCE and the landowners to third parties that the gain realized by the parties in the said transaction 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 and documentary stamp tax imposed under Sections 106 and 196, both 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 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; (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 Development Agreement executed by and between the LANDOWNERS and First MCE for the development of the LANDOWNERS' parcel of land is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997. (BIR Ruling Nos. DA-065-97; DA-286-98; DA-061-99; DA-079-2-08-99; DA-107-99). 2. The allocation of the designated lots among the members of the joint venture as stipulated in the Land Development 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 contribution. Nonetheless, the acknowledgment to the Deed is subject to the documentary stamp tax under Section 188 of the Tax Code of 1997. On the other hand, upon the subsequent disposition of the lots 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 under Section 106 and to the documentary stamp tax imposed under Section 196, all of the Tax Code of 1997, whereas the donation by the landowners of a road lot covered by TCT No. 131434 of the Registry of Deeds of Paraaque, Metro Manila to the Municipality of Paraaque is exempt from the payment of the donor's tax pursuant to Section 101 (A)(2) 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 shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group