BIR Ruling [DA-050-03]

February 20, 2003 BIR RULING [DA-050-03] 22 (B), 27, 196 DA-083-99, DA-440-2000 Alba Romeo & Co . 7/F, Multinational Bancorporation Centre 6805 Ayala Avenue Makati City Gentlemen : This refers to your letter dated February 3, 2003, the pertinent portion of which is quoted as follows: "Pacific Rehouse Corporation, a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with address at 22/F Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, Makati City (hereafter referred to as the OWNER) and Philippine Estates Corporation, a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with address at 22/F Citibank Tower, 8741 Paseo de Roxas, Makati City (hereinafter referred to as the DEVELOPER) has entered into a Joint Venture Agreement with the following stipulations: a. The OWNER is the owner in fee simple of parcels of land, all of which are stipulated in Jaro, Iloilo City with a total area of 143,634 square meters covered by TCT Nos. T-73102, T-136759, T-135537 & T-136760. b. The OWNER desires to have the above properties developed into a residential subdivision with amenities, by a reliable and competent developer; c. The DEVELOPER is engaged in the business of, among others, developing subdivisions and as such has offered to develop the said properties into a residential subdivision with amenities under and thru Joint Venture, which offer was accepted by the OWNER. d. The OWNER shall provide the real properties consisting of the aforementioned parcels of land and the DEVELOPER shall, at its own expense, develop the said properties into a residential subdivision (hereinafter called the "PROJECT"). e. Forty (40%) percent of the net saleable area of the PROJECT shall belong to the OWNER while the remaining sixty (60%) percent of such saleable area shall belong to the DEVELOPER. DCSETa f. Individual Titles to the PROJECT shall be issued separately under the name of the OWNER and DEVELOPER, in accordance with the said proportion." Based on the foregoing, you now in effect request for a ruling on the tax consequence of the foregoing transaction. In reply, please be informed that pursuant to Section 22(B) of the Tax Code of 1997, the term 'corporation' shall include partnerships, no matter how created or organized, joint stock companies, joint accounts ( cuentas en participacion ),associations, or insurance companies, but does not include general or 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. In view thereof, it is our opinion that the joint venture of Philippine Estates Corporation, as developer, and Pacific Rehouse Corporation, as lot owner, for the development of a residential subdivision with amenities is not subject to the corporate income tax under Section 27 of the Tax Code of 1997. However, the co-venturers are separately subject to the regular corporate income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. Considering the foregoing, the Joint Venture Agreement executed by Philippine Estates Corporation and Pacific Rehouse Corporation for the development of a residential subdivision with amenities, and the allocation of their respective shares in the project will not give rise to a separate taxable joint venture within the meaning of Section 22(B), in relation to Section 27(A) of the Tax Code of 1997, and that the allocation between Philippine Estates Corporation and Pacific Rehouse Corporation of their respective shares in consideration of their contribution in the project, as stipulated in the Joint Venture Agreement, is not a taxable event and is not subject to income/withholding tax because the allocation is a mere return of the capital that each has contributed to the project. However, should Philippine Estates Corporation and Pacific Rehouse Corporation sell any of the portions allocated to them to third parties, the gain that may be realized by them from such sale effective January 1, 2000 will be subject to the regular corporate income tax under Section 27 of the Tax Code of 1997, and to the creditable/expanded withholding tax (EWT) under Revenue Regulations 2-98, as amended by Revenue Regulations Nos. 6-2001 and 12-2001 ( BIR Ruling No. 274-92 dated September 30, 1992; BIR Ruling No. UN-025-95 dated January 11, 1995; and BIR Ruling No. DA-488-98 dated November 16, 1998 ), and necessarily, the said transaction shall be subject to the documentary stamp tax imposed under Section 196 of the same Code. ( BIR Ruling No. 207-92 dated July 16, 1992; BIR Ruling No. 317-92 dated October 28, 1992 ). 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service