BIR Ruling [DA-042-06]

February 14, 2006 BIR RULING [DA-042-06] DA-204-2001 dtd 10/19/2001 AFP Retirement and Separation BenefitsSystem Camp General Emilio Aguinaldo Quezon City Attention: Honorio S. Azcueta Executive Vice President/COO Gentlemen : This refers to your letter dated November 7, 2005, requesting Certificate of Tax Exemption and Certification Authorizing Registration (CAR) for your share of the subdivision lots as per Joint Venture Agreement and Deed of Partition covering the Benjamin 9 Northville Subdivision project located at Bo. Pandacaque, Mexico, Pampanga. It is represented that the Armed Forces of the Philippines Retirement and Separation Benefits System (AFPRSBS) is a pension fund duly organized and existing under and by virtue of P.D. 361, as amended by P.D. 1656; that it is now engaged in the development of the 57-hectare property particularly identified as Lot 2862 embraced by TCT No. 509405-R located at Bo. Pandacaque, Mexico, Pampanga, through its joint venture partner Benjamin Construction Equipment, Inc. (BCEI for short); that the development of this property is divided into four (4) phases, the first phase which is composed of 20,0497 hectares is already at 30% completion as of 30 September 2005; that as stipulated in the joint venture agreement, individual titling of the residential lots of the project is being undertaken by your JV partner; that corollary to this, on December 9, 1999, the Commissioner of Internal Revenue confirmed that the AFPRSBS is considered an employee's trust fund and therefore income of the trust fund from its investments remain exempt from income tax and consequently from withholding tax pursuant to Section 60 (B) of the Tax Code of 1997; that it is your opinion that since the foregoing holds that the project does not contemplate the formation of an unincorporated joint venture, then the partition of lots to AFPRSBS as their 45% share in the transaction is likewise exempt from income tax and withholding and other taxes. In reply thereto, please be informed 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. [ Sec. 22(b) of the Tax Code of 1997 ] It is the intention of the legislature to exclude joint venture formed for the purpose of undertaking construction projects from the term corporation. Thus, the Joint Venture Agreement between BCEI and AFPRSBS for the development of the above-mentioned parcels of land will not create a separate taxable entity within the meaning of the abovecited section. Accordingly, the allocation between BCEI and AFPRSBS of the developed lots as their participating interest in the project as stipulated in the Memorandum of Agreement is not a taxable event and is not subject to income tax and consequently to withholding tax. ( BIR Ruling No. 010-96 dated January 23, 1996 ) However, when the parties subsequently sell or dispose of the developed lots which they received or will receive as their respective shares or participating interests in the projects to third parties, the gains that may be realized by the co-venturers from such sale will be subject to the regular rate of corporate income tax prescribed under Section 27 of the Tax Code of 1997. ( BIR Ruling Nos. DA212-99 dated April 07, 1999; DA187-00 dated March 25, 1999; DA 264 dated May 5, 1999 ) STcAIa However, since AFPRSBS has been qualified as an employee's trust under Section 60(B) of the Tax Code of 1997, any income derived by the trust fund from its investments shall be exempt from income tax and consequently from withholding tax. (BIR Ruling No. DA673-99 dated December 09, 1999) Accordingly, it is the opinion of this Office that the sale of the lots allocated to AFPRSBS pursuant to the aforecited Memorandum of Agreement is not subject to income tax and consequently to the withholding tax prescribed in Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001, as amended. Moreover, the sale of the developed lots allotted to AFPRSBS is likewise not subject to value-added tax prescribed in Section 106(A) of the Tax Code of 1997 since the above-mentioned lots are not held primarily for sale to customers or held for lease in the ordinary course of trade or business but intended for the members of the AFPRSBS. However, it shall be subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997 based on the actual consideration or fair market value determined in accordance with Section 6 (E) of the said Code, whichever is higher. This ruling is being issued based on 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. aIcDCA Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service