BIR Ruling [DA-048-03]

February 20, 2003 BIR RULING [DA-048-03] 22 (B), 27 (A), 196, 57 (B) DA-096-2000 Homeowners Development Corp. 3rd Flr., Hernandez Bldg., 154 Katipunan Ave. St. Ignatius Village, Quezon City Attention: Mr. Jaime I. Hernandez President Gentlemen : This refers to your letter dated February 5, 2003 quoted as follows: "We respectfully request confirmation of our opinion that (1) the joint development of a residential subdivision by Homeowners Development Corp. ("HDC") and Herminia O. Garcia, Jose R. Oliveros, Reynaldo J. Oliveros, Nieves O. Santos and Simplicio R. Oliveros ("as OWNERS") will not create a taxable joint venture within the meaning of Section 22(B) in relation to Section 27(A) of the National Internal Revenue Code of 1997 (the "Tax Code"), and (2) the allocation of their respective interests in the project, and the execution of the Deed of Partition to implement such allocation, is not a taxable event and is not subject to income/expanded withholding tax value-added tax, and documentary stamp tax under Section 196 of the Tax Code." The facts as represented, are as follows: 1. HDC is a corporation duly organized and existing under Philippine laws and is engaged in the development of real estate. Herminia O. Garcia, Jose R. Oliveros, Reynaldo J. Oliveros, Nieves O. Santos and Simplicio R. Oliveros are owners of a parcel of land with an area of 13,813.35 square meters, more or less, located in Sitio Dalig, District No. 2, Municipality of Antipolo City, to be registered under a new Transfer Certificate of Title from the original Transfer Certificate of Title No. R-10878 of the Registry of Deeds of Antipolo Branch, containing an area of 17,421 square meters; more or less. 2. On December 10, 2002, HDC and the OWNERS entered into a Joint Development Agreement (the " Agreement ") for the joint development of the parcel of land (herein referred to as the " Project "). The Project consists of the planning, construction and development of the Project into a residential subdivision known as Birmingham Homes 3, located at M.L. Quezon Ave., Antipolo City, as well as the marketing and sale of the developed lots located therein (saleable developed lots being referred to as " Developed Lots "). The specific terms of the Agreement are as follows: 1. The Developer will shoulder the cost to develop the land. 2. The parties agreed on a partition of subdivision lots on a 55%-45% basis in favor of the Developer, part of which shall be registered in the name of the Developer while the remaining lots shall be titled in the name of the Landowner. In view of the foregoing, you now request for a confirmation of your opinion that: 1. The joint venture whereby the Owners will contribute the land and HDC will shoulder the development costs and expenses of the entire Project does not give rise to a taxable joint venture, hence, is not subject to corporate income tax pursuant to Section 22(B), in relation to Section 27(A) of the Tax Code of 1997. 2. The allocation and the distribution of their respective shares in the Project consisting of Developed Lots in consideration of their respective contributions to the joint venture is not a taxable event, hence, is not subject to the regular corporate income tax under Section 27(A) of the Tax Code, nor creditable withholding tax under Revenue Regulation No. 2-98, as amended, nor the value-added tax under Section 106, because the allocation is a mere return of capital that each of the parties has contributed to the Project. 3. The Deed of Partition to be executed by Owners and HDC whereby they allocate and distribute among them their respective shares in each phase of the Project in exchange for their respective contributions is without monetary consideration, hence, is not subject to value-added tax under Section 106 of the Tax Code, income/creditable withholding tax under Revenue Regulations No. 2-98, as amended; and the documentary stamp tax under Section 196 of the Tax Code. 4. Consequently, the confirmation of this request will authorize the Revenue District Officer (RDO) of the revenue district where the parcel of land is located, to issue the corresponding Tax Clearance Certificate with regard to the transfer of the Developed Lots to Owners and HDC based on their respective allocations without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax, and value-added tax. 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, as amended, defines 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 venture 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 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 entered into by and between the OWNERS and HDC is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. cCSDTI 2. The allocation and distribution of the lots between OWNERS and HDC in consideration of their respective contributions is not a taxable event and is not subject to income tax or any withholding tax because the allocation is a mere return of capital that each has contributed to the joint venture. OWNERS did not convey or transfer its ownership or interest over its parcel of land when it contributed the aforesaid landholding to the joint venture. The said contribution constituted HDC's capital contribution to the joint venture project, and therefore, such contribution is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax. The transfer is also not subject to VAT, since the transfer is not in the course of business but a capital contribution. 3. The Deed of Partition whereby the OWNERS and HDC will allocate unto each other their share in the saleable and developed lots in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, income tax and any withholding tax because the allocation is made without monetary consideration and is not in connection with a sale. The partition is made merely to segregate the developed lots between the parties, as return of capital which each contributed to the joint project. However, the acknowledgment to said Deed of Partition is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. 4. This will authorize the Revenue District Officer (RDO) of the revenue district where the parcel of land is located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the transfer of the titles to the lot to be received by the OWNERS and HDC based on their respective allocations without treed of presentation of proof of payment of the creditable withholding tax, documentary stamp tax and value-added tax. The gain that may be realized by the Parties upon subsequent disposition of the lots allocated to them will be subject to the regular income tax rate under Section 27(A) of the Tax Code of 1997, and to the creditable withholding under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001. Moreover, said 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