BIR Ruling [DA-055-06]

February 22, 2006 BIR RULING [DA-055-06] 22 (B); DA-491-2005 Roxaco Land Corporation 7F CG Bldg, 101 Aguirre St., Legaspi Village Makati City Attention: Attys. Florencio M. Mamauag, Jr., and Fritzie P. Tangka-Fabricante Gentlemen : This refers to your letter dated December 15, 2005 requesting on behalf of your client, Roxaco Land Corporation ["ROXACO"] ,for a ruling on the tax implication of a joint venture agreement it had executed with Marilo Realty & Development Corporation ["MARILO"] . It appears that MARILO is the registered owner of five (5) parcels of land located in Barangay Gumamela, Balayan, Batangas with an aggregate area of 100,262 square meters covered by Transfer Certificates of Title Nos. T-101498, T-57132, T-57133, T-32509 and T-101278 issued by the Register of Deeds of Balayan, Batangas; that on the other hand, ROXACO, the developer is a corporation duly organized and existing under and by virtue of the laws of the Philippines with principal office address at Units 1 and 2, Landing Commercial Building, J.P Laurel Street, Nasugbu, Batangas; that both MARILO and ROXACO have entered into a Memorandum of Agreement (MOA) on December 8, 2004 whereby they expressly stipulated that MARILO shall contribute the above-mentioned parcels of land to the joint venture project while ROXACO shall shoulder the expenses for the development of the said parcels of land into an open lot, middle class residential subdivision; and that without transfer of ownership or title, ROXACO and MARILO agreed to allocate between themselves the saleable developed lots in the following manner: Sixty Five percent (65%) shall be allocated to ROXACO while the remaining Thirty Five percent (35%) shall be allocated to MARILO. 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. 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 as additional income tax lien. DASEac 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 Owner and the Developer is not subject to income tax under Section 27 of the Tax Code of 1997. The assignment by the Owner to the Developer of its corresponding share of the net proceeds of sale of lots 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 aforestated 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 Memorandum of Sharing whereby the Owner and the Developer will allocate unto each other their shares in the total saleable lots/net proceeds of the sale, 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 acknowledgement to said Memorandum of Sharing 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 parcel of land, the Owner, neither sells, barters, exchanges goods, properties nor render services to be subject to VAT. (BIR Ruling No. DA-491-2005 dated December 6, 2005) 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 27(D)(5), 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 property, 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service