BIR Ruling [DA-047-04]

February 5, 2004 BIR RULING [DA-047-04] 22 (B) DA-192-2001 E.L. Punsalan and Associates G-104 Medical Plaza Makati Amorsolo corner Dela Rosa Sts. Legaspi Village, Makati City Attention: Atty. Eranio L. Punsalan Counsel Gentlemen : This refers to your letter dated October 24, 2003 requesting on behalf of your client, Meridien Land Holdings, Inc. (MLHI) for a ruling relative to the Joint Venture Contract entered into by and between MLHI and Reynaldo G. Syjuco, Elizabeth G. Syjuco, Sylvia S. Vasquez, Robert G. Syjuco and Gloria G. Syjuco (collectively referred to as the Owners). Documents submitted show that the Owners owned two (2) parcels of land located at Makati City covered by Transfer Certificates of Title (TCT) Nos. 171719 and 171720, while MLHI is the registered owner of a lot covered by TCT No. 200365 also located at Makati City; that the Owners and MLHI entered into a Joint Venture Contract for the development of a multi-storey condominium building on said parcels of land; that MLHI undertakes to develop the aforestated lots; that the parties likewise agreed that the Owners shall be entitled to eight hundred (800) square meters of unit saleable area of the completed condominium building based on a projected aggregate/total saleable area of five thousand one hundred forty four (5,144) sq.m. of units and thirty-four (34) parking slots, even if the said projected aggregate saleable area shall fall below 5,144 sq.m. and 34 parking slots, while the remaining areas of the condominium building shall belong to MLHI, provided, however, that in the future, additional saleable area is generated by way of conversion of common area to saleable area or by the construction of additional floors or creation of saleable rights, like communication facilities or the like, the same sharing of 14.79% and 85.21% respectively, between the Owners and MLHI shall prevail; that the Owners subsequently assigned all their rights and interest over their properties to Westminster Realty and Development Corporation (Westminster for brevity) thru a Deed of Assignment of Rights executed on December 11, 2003; that the TCTs covering the parcels of land owned by the Owners were later transferred in the name of Westminster under TCT Nos. 219442 and 219443; that pursuant to the said Deed as a consequence of the assignment of properties, the Owners must likewise assign their rights and interests over the Joint Venture Contract executed with Meridien in favor of Westminster; that you now request for an opinion relative to the following: 1. Exemption of the Joint Venture from income tax under Section 27, in relation to Section 22(B) of the National Internal Revenue Code of 1997 (NIRC) and the relevant provisions of Presidential Decree No. 929, amending subparagraph (b) of Section 191 of the National Internal Revenue Code, as amended; 2. Exemption of the assignment by MLHI of its realty to WRDC from corporate income tax/creditable withholding tax and capital gains tax, it being merely a transaction to effect its capital contribution to the joint venture and not a taxable event; 3. Exemption of the Partition Agreement (Joint Venture Contract, Article V, Shares of the Parties) between MLHI and WRDC, whereby the parties agreed to allocate to each other their aliquot shares of 85.21% and 14.79% respectively, in consideration of their capital contribution, from documentary stamps imposed under Section 196 or 176 of the NIRC, as the case may be. The allocation is neither with monetary consideration nor in connection with a sale. This is merely to segregate the saleable areas between the two parties, as return of their capital contribution in the joint venture; and 4. Exemption of the transfer of the saleable areas to MLHI and WRDC, pursuant to the dictates of the immediately preceding paragraph, from Value-Added Tax (VAT) under Section 105 of the NIRC. The said transfer is neither a sale, barter, exchange of goods, property nor services rendered that is subject to VAT. In reply, please be informed that: 1. Pursuant to Section 22(B) of the Tax Code of 1997, the term "corporation" includes partnerships, no matter how created or organized, joint stock companies, joint accounts ( cuentas en participacio n), 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 as additional income tax lien. Considering therefore, 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 hereby opines that the joint venture by and between the Owners and MLHI is not subject to income tax under Section 27 of the Tax Code of 1997. 2. The assignment by MLHI of its realty to the Owners or Westminster is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax, because the aforestated assignment is merely a transaction to effect its capital contribution to the joint venture and not taxable event. (BIR Ruling No. DA-192-2001 dated October 17, 2001) 3. The Partition Agreement whereby the Owners or Westminster and MLHI will allocate unto each other their share in the unit saleable area of the condominium project, 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. DA-240-2001 dated November 16, 2001) IaSAHC 4. 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 to 108 of the same Tax Code. Hence, by contributing its parcels of land, the Owner, neither sells, barters, exchanges goods, property nor renders services to be subject to VAT. (BIR Ruling No. DA-240-2001 dated-November 16, 2001; BIR Ruling No. DA-115-2001 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 (RR) No. 2-98, as amended by RR No. 6-2001 or capital gains tax under Section 24(D)(1), as the case may be. 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 ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service