BIR Ruling [DA-025-06]

January 31, 2006 BIR RULING [DA-025-06] Sec. 22 (B); DA-118-2004 Dante D. Torres & Co. CPA's 2/F Queensland Commercial Plaza Maligaya Village, Dolores, San Fernando City Attention: Mr. Dante D. Torres Accountant Gentlemen : This refers to your letter dated January 26, 2005 stating that Mrs. Ildefonsa Z. Gesmundo is the registered owner of five (5) parcels of land situated at Tandang Sora, Quezon City, more particularly identified and described as follows: TCT NO. LOT/BLOCK NO. AREA N-213733 L-7; B-3 412 Sq. M. N-213732 L-8; B-3 407 Sq. M. N-213734 L-9; B-3 423 Sq. M. N-213735 L-10; B-3 450 Sq. M. N-209067 L-17; B-3 410 Sq. M. that Mrs. Gesmundo entered into a Joint Venture Development Agreement with Culiat Realty and Marketing Corporation ("CRMC") on January 24, 2006, wherein she obliged herself to execute a Deed of Assignment conveying her above properties to CRMC as her contribution to the Joint Venture Project; that CRMC, on the other hand, will provide the technical know-how and finances for the execution of the project; that the agreed sharing is 55/45 percent for CRMC and Mrs. Gesmundo, respectively; and that based on the foregoing, you are requesting for a ruling that the above transfer of properties is not subject to the capital gains and documentary stamp taxes. In reply, please be informed that 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. It is to be emphasized, however, that P.D. 929 excluded joint venture formed for the purpose of undertaking construction projects from the definition of the term "Corporation" because (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: Considering that it is the intention of the legislature to exclude joint venture of 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 Mrs. Gesmundo and CRMC, for the development and subdivision of the aforementioned properties is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997, as amended. Moreover, the transfer of the property by Mrs. Gesmundo to CRMC pursuant to their Joint Venture Development Agreement is not subject to the capital gains tax and to the documentary stamp tax imposed, respectively, under Sections 24(D)(1) and 196 of the Tax Code of 1997, as amended. However, the co-venturers are separately subject to the regular individual and corporate income taxes on their respective taxable income during each taxable year derived by them from the aforesaid construction project. Moreover, the Joint Venture Development Agreement and the Deed of Assignment entered into by and between Mrs. Gesmundo and CRMC are subject to the documentary stamp tax of P15.00 imposed under Section 188 of the Tax Code of 1997. DCTSEA Moreover, the allocation and distribution of the respective shares of the co-venturers in the project consisting of developed lots in consideration of their respective contributions, as stipulated in the Joint Venture 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 that each has contributed (BIR Ruling Nos. 10-96 dated January 23, 1996; DA065-97 dated February 10, 1997; DA286-98 dated June 29, 1998) However, the sale by the co-venturers of their respective shares in the project shall be subject to the creditable withholding tax, VAT and documentary stamp tax pursuant to Revenue Regulations No. 2-98, as amended, Sections 106(A) and 196 of the Tax Code of 1997. Finally, this will authorize the Revenue District Officer (RDO) of the revenue district where the properties are located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the transfer of the titles to the lots to be received by Mrs. Gesmundo and CRMC based on their respective allocations pursuant to the Joint Venture Development Agreement without need of presentation of proof of payment of creditable withholding tax, documentary stamp tax and value-added tax. (BIR Ruling DA-118-2004 dated March 16, 2004) 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service