BIR Ruling [DA-062-02]

April 03, 2002 BIR RULING [DA-062-02] 22 (B), 27 (A), 196, 57 (B) DA-155-2001 Sta. Lucia Realty & Development, Inc. Ground Flr., State Financing Bldg. Ortigas Avenue, Mandaluyong City. Attention: Atty. Miriam G. Daway Legal Counsel Gentlemen : This refers to your letter dated September 19, 2001 quoted as follows: "1. On May 1991, Sta. Lucia Realty & Dev., Inc. entered into a Development Agreement with Aznar Brothers Realty and Aznar Enterprises, for the development of its 57 has. properties located at Mactan, Cebu, into a residential subdivision, with a sharing of 50-50 of the resultant subdivision lots. It was also agreed that these lots when sold shall have an accompanying amenities of a Beach Resort and Country Club. It was also agreed that each residential lot would have a share in the Beach Club which shall be later formed by the same parties, and which ownership has the same sharing of 50-50 in accordance with the agreement. "2. Pursuant to said agreement, the parties incorporated into a Vista Mar Beach Resort and Country Club, with Sta. Lucia Realty developing the entire complex in exchange for its 50% share of the unissued portion of the authorized membership certificates, while the Aznar group in exchange for its 50% share of the unissued portion of the Club authorized membership certificates, shall convey unto the club, the total land area allocated to the Beach Club. "3. The following documents were thus executed, the (1) Articles of Incorporation of Vistamar Beach Resort and Country Club, and the (2) Development Agreement between Vistamar Beach Resort and Country Club and Sta. Lucia Realty, wherein the latter shall construct the club's facilities in exchange for 1,500 membership certificates of the club, and (3) Agreement to Assign between Vistamar Beach Resort and Country Club and Aznar Brothers Realty wherein Aznar Brothers shall receive 1,500 membership certificates of the club in exchange for 6,550 sq.m. lot to be assigned to the Club, as the land on which the club facilities have been constructed by Sta. Lucia Realty, all these documents were all executed pursuant to the above development agreement. The Club's outstanding authorized membership certificates is 4,000, and the 1,000 certificates have been paid for in cash in accordance with the requirements of the SEC. "4. A Memorandum of Sharing was also executed to transfer the residential lots of Sta. Lucia Realty comprising its 50% share in the residential subdivision. "5. When the titles have been released for the portion allocated to the beach resort, and pursuant to the Agreement to Assign, Aznar Brothers Realty Co. executed a Deed of Assignment in favor of Vistamar Beach Resort and Country Club covering the 6,550 sq.m. "We would like to request for the following ruling on the tax liabilities of the parties pursuant to the above arrangement, as follows: "1. What would be the tax liability of Aznar Brothers Realty Company when it assigns to Sta. Lucia its 50% share of the residential lots being the developer of the project, in accordance with their development agreement; "2. What would be the taxes to be settled in the following transactions: "2a. When Sta. Lucia shall be given its 1,500 shares by the club for its development efforts "2b. When Aznar Brothers Realty shall be given it 1,500 shares when its assigns its lot to the club, with an area of 6,550 sq.m. What about the transfer of the land to the club, what are the taxes to be settled so that the titles of these lots could already be registered to the club; "2c. What would be the tax liabilities of each party, when they sell their corresponding club certificates to third party (buyer) and when they sell their respective share of subdivision lots to third party (buyer)." 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. 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 among Sta. Lucia Realty, Aznar Brothers Realty Co. and Aznar Enterprises, Inc. are not subject to income tax under Section 27 of the Tax Code of 1997. The assignment by Aznar Brothers Realty Company and Aznar Enterprises, Inc. to Sta. Lucia Realty of its corresponding share of the resultant subdivision 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 Partition Agreement whereby the Aznar Group and Sta. Lucia Realty will allocate unto each other their share in the saleable area, 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 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 the parcel of land, the Aznar Group 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) In the same manner, the conveyance by Vistamar Beach Resort and Country Club of its 1,500 shares each to Sta. Lucia Realty and to Aznar Brothers Realty Company for their development efforts and contribution of lots, respectively, is exempt from the payment of to regular income tax/creditable withholding tax. Inasmuch as Aznar Brothers Realty Company did not cede their ownership or interest over its parcels of land when it contributed a portion of its landholdings to Vistamar Beach Resort and Country Club for the reason that the above-mentioned transfer is merely pooling of resources to a common fund, said transfer is likewise not subject to regular income tax/creditable withholding tax. The transfer is also not subject to VAT, since the transfer is not in the course of business but a capital contribution. 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. 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 properties, 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 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 Acting Assistant Commissioner Legal Service