BIR Ruling [DA-074-05]

March 4, 2005 BIR RULING [DA-074-05] 22 (B); DA-450-2004 Sta. Lucia Realty and Development, Inc. Ground Floor, The Sentinel Condominium Archbishop Reyes Avenue Banilad, Cebu City Attention: Mr. Gerardo D. Quintos Finance Officer Gentlemen : This refers to your letter dated January 13, 2005 stating that Sta. Lucia Realty and Development, Inc. (Sta. Lucia for brevity), a domestic corporation with branch office address at The Sentinel Condominium, Gov. Cuenco Avenue, Banilad, Cebu City had entered into various Joint Venture Agreements with the following: Name of Joint Venture Partner % of Sharing Location of Property 1. Bankfield Corporation 50%-50% Consolation, Cebu 2. Martin Malagar 50%-50% Consolation, Cebu 3. Edgar L. Godinez, et al. 60%-40% Compostela, Cebu 4. Dionisio Narbuada 55%-45% Pulangbato, Cebu City 5. Leo L. Dela torre, et al. 52%-48% Pulangbato, Cebu City whereby the former would develop the real properties of its joint venture partners. Among the terms and conditions of the Joint Venture Agreements are: a) That the joint venture partners would contribute their real properties to the developer; b) That Sta. Lucia would develop said real properties into a residential subdivision and that all cost and expenses for the development would be at its sole account; c) That the resultant saleable lots would be shared by the parties; d) That the above-mentioned parties shall have control and disposition in the sale of their respective share in the Joint Venture Agreement. Similar to any other Joint Venture Agreements, upon the completion of the aforesaid project, ownership of the lots will be apportioned between the individual landowners and the herein developer, Sta. Lucia, as their respective shares in such joint venture undertaking. Further, the parties agreed to execute a Sharing Agreement whereby the share of the developer would be assigned and titles thereto will be transferred and registered in its name. You now in effect request for a ruling that the assignment of the lots to Sta. Lucia, pursuant to the Joint Venture Agreements is not subject to capital gains tax or documentary stamp tax. In reply, please be informed as follows: Pursuant to 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 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. AcTDaH P.D. No. 929 amended the definition of the taxable corporation as not to include a 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 subjected to additional income taxes. 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 Joint Venture Agreements entered into by and among the afore-named landowners and Sta. Lucia are not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. The allocation of saleable lots of the project between the landowners and Sta. Lucia in consideration of their respective contributions, as stipulated in the Joint Venture Agreements are not taxable events and are not, subject to income tax or any withholding tax because said allocations are mere returns of capital that each has contributed. (BIR Ruling No. DA-192-2001 dated October 17, 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 their parcels of land, the landowners neither sell, barter, exchange goods, properties nor render 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) The Sharing Agreement whereby the landowners and Sta. Lucia 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, income tax and any withholding tax because the allocation is made without monetary consideration and is not in connection with a sale. The partition is made merely to segregate the saleable areas between the parties, as return of the capital which each has contributed. However, the acknowledgment to said Sharing Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. It is understood however, that upon 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 24(D)(1), 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 properties, whichever is higher. Furthermore, the said sale shall likewise be subject to VAT. HcSCED 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 will be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group