BIR Ruling [DA-047-03]

February 20, 2003 BIR RULING [DA-047-03] 22 (B), 27 (A), 196, 57 (B) DA 062-2002 Sta. Lucia Realty & Development, Inc. 3rd & 4th Floors Bldg. II-SLE Grand Mall Marcos Hi-way cor. Felix Avenue Cainta, Rizal Attention: Atty. Miriam G. Daway Legal Counsel Gentlemen : This refers to your letter dated February 7, 2002 stating that Anamel Builders Corporation is the absolute and registered owner of several parcels of land situated in Cabanatuan City with an aggregate area of 412,963 square meters; that on April 20, 1999, Sta. Lucia Realty & Development, Inc. (Sta. Lucia) entered into a Joint Venture Agreement (JVA) with Anamel Builders Corporation for the development of the said lots into a residential subdivision, wherein Sta. Lucia shall be the developer of the project; and that the parties agree on a sharing of 55-45 on the resultant subdivision lots. Based on the foregoing representations, you now request for a ruling on the tax consequences of the following transactions: "1. What would be the taxes involved when Anamel Builders Corporation assigns unto Sta. Lucia its corresponding 55% share on the resultant subdivision lots by virtue of the latter's compliance of its obligation under the JVA, being the developer of the project; and "2. What would be the taxes involved when the parties eventually sell their share of subdivision lots to the buying public." In reply thereto, please be informed. In reply thereto, 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; (4) To assist them in achieving competitiveness with foreign contractors. 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 Anamel Builders Corporation and Sta. Lucia, as Developer, for the development and subdivision of the aforesaid properties into a residential subdivision is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997. The assignment by Anamel Builders Corporation to Sta. Lucia of its corresponding share of the resultant 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 aforestated assignment is a mere return of capital contribution, and therefore not a taxable event. ( BIR Ruling No. DA192-2001 dated October 17, 2001 ) The Partition Agreement whereby Anamel Builders Corporation and Sta. Lucia 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 because the allocation is made without monetary consideration and is not in connection with a sale. The allocation is made merely to segregate the saleable area between the parties, as the return of the capital which each has 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. ( BIR Ruling No. DA240-2001 dated November 16, 2001 ) The transfer is also not subject to VAT since under Section 105 of the Tax Code of 1997, any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services and any person who imports goods shall be subject to VAT imposed in Sections 106 and 108 of the same Tax Code. Hence, by contributing the properties, Anamel Builders Corporation, neither sells, barters, exchanges goods, property nor renders services to be subject to VAT. ( BIR Ruling Nos. DA240-2001 dated November 16, 2001; DA115-2001 dated September 5, 2001 ) It is understood however, that 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 creditable withholding tax under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001. Moreover, such 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. 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. SAHaTc Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service