BIR Ruling [DA-061-99]

February 5, 1999 BIR RULING [DA-061-99] Filinvest Land Incorporated 173 P. Gomez Street San Juan Metro Manila Attention: Mr . Efren M . Reyes Senior Vice President, Chief Financial Officer Gentlemen : This refers to your letter dated February 23, 1998 requesting for a ruling on the tax consequences of the Development Agreement entered into by and between Filinvest Land Incorporation (FLI), as the developer, and Mr. Carmelo Gempesaw, Ms. Flordeliz Gempesaw and East Coast Mercantile Corporation, as the owners (Owners). cdpr It is represented that FLI is a domestic corporation engaged in the business of acquiring, developing and selling real estate, including residential subdivisions; that the Owners are the absolute and registered owners in fee simple of parcels of land located at Matina, Davao City with an aggregate area of 286,948 square meters; that on March 16, 1995, a Development Agreement was entered into by and between, FLI and the Owners for the development of said parcels of land into a residential subdivision; that such agreement was subsequently amended to indicate the area of the property, which will be the subject of the Development Agreement; that upon accounting and reconciliation of the individual lots and their respective areas, it was discovered by the parties that the actual area intended by them to be subject of the agreement is 288,514 square meters; that the essential features of the Development are as follows: "(1) The Development Agreement shall cover parcels of land owned by the Owners with an aggregate area of 288,514 square meters,. FLI will undertake the development of the property into a residential subdivision with such improvements and facilities as required by the Owners. It will shoulder all the costs and expenses incurred in doing such work; "(2) In consideration of the developmental obligations it will assume, FLI will receive 60% of the saleable lost in the property. The remaining 40% will be retained by the Owners. Once the lots to be assigned have been determined, both parties will execute a Partition Agreement to formalize the distribution of saleable lots between them; "(3) In addition to its obligation to develop the property, FLI will also handle the marketing of the lots pertaining to the share of the Owners as well as the management of receivables and collection of lot buyers' payments on such lots. For these services, FLI will receive a marketing, management and collection fee of 12% of the price of the Owners' lots sold; and "(4) FLI has the option to construct housing units on the saleable lots assigned to the Owners. In such event, the owners shall assign to FLI the lots on which the housing units will be constructed. In turn, FLI will execute in favor of the Owners a Deed of Assignment of receivables over the sales proceedings of the said lots." Based on the foregoing representations, you now request for a ruling that "1. The Development Agreement between FLI and the Owners for the development of the parcels of land in Matina, Davao City into a residential subdivision and the allocation of saleable lots, will not give rise to a taxable joint venture within the meaning of Section 20(b) [now Section 22(B)] in relation to Section 24(a) [now Section 27(A) of the National Internal Revenue Code (NIRC)], prior to its amendment by Republic Act No. 8424; xxx xxx xxx "2. The allocation of saleable lots between FLI and the Owners in consideration of their respective contributions, as stipulated in the development Agreement, 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. However, should FLI or the Owners sell any of the saleable lots allocated to them to third parties, the gain that may be realized from such sale will be subject to the regular 35% (now 34%) corporate income tax under Section 24 of the NIRC, and to the creditable/expanded withholding tax under Revenue Regulations No. 6-85, as amended . . .; "3. The Partition Agreement whereby FLI and the Owners will allocate unto each other their share in the saleable lots in consideration of their respective contributions, is not subject to the documentary stamp tax imposed under Section 196 of the NIRC, to income tax and any withholding tax because the allocation is made without monetary consideration and is not in connection with a sale. Instead, the partition is made merely to segregate the saleable lots between the parties, as the return of the capital which each contributed . . ." In reply, please be informed as follows: 1. Pursuant to Section 20(b) of the Tax Code, as amended [now 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 participation), 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 with the Government. It is to be emphasized, however, that P.D. 929 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 joints 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 is of the opinion as it hereby holds that the Development Agreement entered into by and between FLI and the Owners is not subject to the corporate income tax under Section 24(a) of the Tax Code, as amended [now Section 27(A) of the Tax Code of 1997]. 2. The allocation of saleable lots between FLI and Owners in consideration of their respective contributions, as stipulated in the Development Agreement is not a taxable event and is not subject to income tax or any withholding tax because the allocation is mere return of capital that each has contributed. However, upon the subsequent disposition by the co-venturers of the lots allocated to them, the gain that may be realized by them from such sale will be subject to the regular corporate income tax under Section 24(a) of the Tax Code, as amended [now Section 27(A) of the Tax Code of 1997] and to the creditable withholding tax under Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, as further amended by Revenue Regulations No. 2-98. (BIR Ruling Nos. 274-92 dated September 30, 1992; 010-96 dated January 23, 1996; BIR Ruling Nos. DA065-97 dated February 10, 1997; DA286-98 dated June 29, 1998) 3. The Partition Agreement whereby FLI and the Owners will allocate unto each other their share in the saleable lots in consideration of their respective contributions, is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code, as amended [also 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. But instead, the partition is made merely to segregate the saleable lots between the parties, as the return of the capital which each contributed. Moreover, Section 185 of the Revised Documentary Stamp tax Regulations (Regulations No. 26) provides that "conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable." Accordingly, since the aforementioned Partition Agreement is without consideration and is not in connection with a sale made to the residential subdivisions, no income was generated and a fortiori, no creditable withholding tax and documentary stamp tax are payable and collectible. However, the acknowledgment to said Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code, as amended [also Section 188 of the Tax Code of 1997]. (BIR Ruling No. DA065-97 dated February 10, 1997) 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. cdtech Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue