BIR Ruling [DA-053-03]

February 21, 2003 BIR RULING [DA-053-03] 22 (B), 27, 196 DA-083-99, DA-440-2000 HGL Development Corporation HGL Building 554 E. Delos Santos Avenue Kalookan City Attention: Ms. Ma. Lourdes O. Maduli Corporate Secretary Gentlemen : This refers to your letter dated January 31, the pertinent portion of which quoted as follows: "Our company has entered into a joint venture agreement with Sta. Lucia Realty & Dev't., Inc. for the development of our properties located at Bo. Tikay, Municipality of Malolos, Province of Bulacan, into a residential subdivision. The undersigned would like to ask for a legal opinion on the possible tax consequences as a result of a consummation of this joint venture agreement. "The facts are: 1. On December 28, 2000, HGL Development Corporation (the Owner) entered into a Joint Venture Agreement with Sta. Lucia Realty & Dev't., Inc. (the Developer) for the development of its 71,919 sq.m. properties locate at Malolos, Bulacan into a residential estate with a sharing of 50-50 of the resultant salable lots, . . .; 2. In accordance with the joint venture agreement, the Developer has caused the development of the properties and the project is now in the process of segregation and transfer of the corresponding share of the DEVELOPER in the resultant salable lots representing its 50% share of the project;" Based on the foregoing, you now request for a ruling on the tax consequence of the foregoing transaction, viz : "1. What would be the taxes involved when HGL Development Corporation transfer to Sta. Lucia Realty, its 50% share of total saleable lots for its development of the project. Would there be capital gains and documentary stamps (and if there is, how much) when the parties eventually execute a memorandum of sharing of the resultant lots in the project. "2. What would be the taxes involved when the parties eventually sell their respective share of saleable lots to third party?" In reply, please be informed that 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 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. 29 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. ISADET 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 Sta. Lucia Realty & Dev't., Inc. and HGL Development Corporation is not subject to income tax under Section 27 of the Tax Code of 1997. The assignment by HGL Development Corporation to Sta. Lucia Realty & Dev't., Inc. of its properties, 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 above-stated assignment is a mere return of capital contribution, and therefore not a taxable event. ( BIR Ruling No. DA-192-2001 dated October 17, 2001 ) The Partition Agreement whereby HGL Development Corporation and Sta. Lucia Realty & Dev't., Inc. will allocate unto each other their share in the residential subdivision, in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 or 176 of the Tax Code of 1997, as the case may be, 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 ) 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 properties, HGL Development Corporation, as well as Sta. Lucia Realty & Dev't., Inc., 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 saleable lots 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. Moreover, the aforesaid sale of the lots 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. 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