BIR Ruling [DA-054-06]

February 22, 2006 BIR RULING [DA-054-06] ABQ & Sons Unit 21 Beverly Glen Lahug, Cebu City Attention: Mr. Antonio B. Quisumbing Gentlemen : This refers to your letter dated January 25, 2006 which was referred to this Office by Revenue Region No. 13, Cebu City by way of 1st Endorsement dated February 7, 2006 requesting for the tax implication relative to the Joint Venture Agreement (JVA) entered into by and between Antonio B. Quisumbing, as Landowner, and ABQ & Sons Realty & Development Corporation, as Developer. It is represented that a JVA was entered into by and between the Owner and Developer on August 11, 2005; that the Landowner is the absolute and registered owner of two (2) parcels of land containing an aggregate area of 8,921 square meters covered by TCT Nos. 8955 and 9214 issued by the Registry of Deeds for the Province of Cebu; that the Developer is a corporation organized and existing under the laws of the Philippines; that it has the knowledge, experience, expertise to develop subdivision and is licensed to engage in real estate development and management; that the Developer shall undertake to develop the aforesaid properties into a low cost or socialized housing subdivision known as Summer Ville Subdivision; that the Landowner shall contribute to the project a total of 8,921 square meters lot covered by TCT Nos. 8955 and 9214 for immediate development, including all its presentations, warranties and obligations under the JVA; that the salient features of the JVA are as follows: 8. SHARING OF THE PROCEEDS AND EXPENSES 8.1. The proceeds from the gross sales or saleable lots generated from all the lands contributed by the Landowner shall be divided in the following: LANDOWNER 35% DEVELOPER 65% 8.2. The respective shares of the Developer and Landowner from the gross sales of saleable House and Lots or Lots only shall be paid only upon the receipt of the take-out proceeds from the proper financing agency. 8.3. The proceeds from the sales of housing units shall be for the exclusive account of the Developer. xxx xxx xxx 8.5. The following expenses shall be shouldered by the Developer and Landowner in accordance with their respective shares: a. Real Estate Tax on the Lots b. Transfer Tax on the Lots c. Withholding Tax as contemplated in BIR Revenue Regulations d. Documentary Stamp on the Deed of Sale e. Documentary Stamp on the Loans Mortgage Agreement f. Special Education Fund g. Urban Development and Housing Loan h. Mortgage Annotation Fee i. Broker's Commission on the Lots j. VAT, if applicable k. Real Estate and Transfer Taxes on the Road Lots and Open Spaces if applicable. ADHcTE In reply thereto, please be informed as follows: 1. Section 22(B) of the Tax Code of 1997 provides that 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 amended the definition of the taxable corporation so 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 an 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 holds that the JVA entered into by and between the Landowner and the Developer is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997 and is not required to file quarterly and final or adjustment/income tax returns. However, the co-venturers are separately subject to the regular income/corporate income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. 2. The allocation and distribution of their respective shares in the Project in consideration for their respective contributions to the said JVA is not a taxable event and is not subject to income tax, withholding tax, value-added tax and documentary stamp tax because the allocation is a mere return of capital that each has contributed. Moreover, in the event that any party defers its right to receive a specific allocation to a later phase of the project for as long as such allocation constitutes part of the total return of its capital, such deferment is still not subject to the aforementioned taxes. However, upon the subsequent disposition by the co-venturers of the said house and lot or lots only 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 Nos. 6-2000 and 12-2000. In addition thereto, 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. ( BIR Ruling No. DA-013-05 dated January 19, 2005 ) 3. The Deed of Partition to be executed by the parties whereby they will allocate and distribute among themselves their respective shares in the Project, in exchange for their respective contributions, being without monetary consideration is not subject to value-added tax, income/creditable and documentary stamp taxes. ( BIR Ruling Nos. 207-92 dated July 16, 1992; 349-93 dated July 30, 1993; DA Ruling No. 025-95 dated January 11, 1995 ) 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. SEcTHA Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service