BIR Ruling [DA-082-03]

March 17, 2003 BIR RULING [DA-082-03] 22 (B), 27 (A), 196, 57 (B) DA-062-2002 Finman Consultants and Management Services Room 209 Criscor Building 1258 Quezon Avenue Quezon City Attention: Ms. Luzviminda R. Molino Accountant Gentlemen : This refers to your letter dated March 4, 2003 stating that your client, Summit Point Realty & Dev., Corp. entered into a joint venture agreement with Sta. Lucia Realty & Dev., Inc. for the development of its properties located at Lipa City, Batangas, into a residential subdivision, golf course and a country club. The facts are as follows: "1. On May 24, 1999, Summit Point Realty & Dev., Corp. and Summit Point Golf and Country Club, Inc., (the Owners) entered into a Development Agreement with Sta. Lucia Realty & Dev., Inc. (the Developer) for the development of their 152.3712 hectares located at Lipa City, Batangas, and another portion with an area of 63.5571 hectares situated at Barrio Sta. Teresita, Sto. Tomas, Batangas, into a golf course, country club and a residential estate with a sharing of 60-40 of the net proceeds of the sale of the subdivision lots and resultant golf shares in the club; . . . " "2. In accordance with the joint venture agreement, the Developer has caused the development of the properties and the project is now in the process of segregation and transfer of the corresponding share of the DEVELOPER in the resultant titles representing its 60% of the project. "3. A Deed of Assignment was already executed by our company to transfer the 60% share of the Developer, Sta. Lucia Realty in the resultant subdivision lots." Based on the foregoing, you now request for a ruling on the tax consequences of the following transactions: "1. What would be the taxes involved when Summit Point Realty & Development Corporation transfers to Sta. Lucia Realty, its 60% share of total saleable lots for its development of the project. "2. When Summit Point Golf & Country Club, Inc., assigns to Sta. Lucia Realty & Development, Inc. the agreed numbers of shares for the latter's development of the golf course and country club and its amenities; "3. What would be the taxes involved in the conveyance of several parcels of land by Summit Point Realty & Development, Inc., to Summit Point Golf & Country Club, in exchange for a number of shares to be issued to Summit Point Realty & Development, Inc. by the Golf Club." 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 between Sta. Lucia Realty & Dev., Inc. and the Owners is not subject to income tax under Section 27 of the Tax Code of 1997. The assignment by the Owners to Sta. Lucia Realty & Dev., Inc. of its corresponding share of the saleable 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 above-stated assignments is a mere return of capital contribution, and therefore not a taxable event. (BIR Ruling No. DA-192-2001 dated October 17, 2001) In the same manner, the conveyance by Summit Point Golf and Country Club, Inc. of its club shares each to Summit Point Realty & Dev., Corp. and Sta. Lucia Realty & Dev., Inc. for their lot contribution and development efforts, respectively, is exempt from the payment of the regular income tax/creditable withholding tax. Inasmuch as Summit Point Realty & Dev., Corp. did not cede its ownership or interest over its parcels of land when it contributed its landholdings to Summit Point Golf and Country Club, Inc. 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. The Partition Agreement whereby the Owners and Sta. Lucia Realty & Dev., Inc. will allocate unto each other their share in the saleable lots and the club shares, in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 or 176 of the Tax Code of 1997, as the case may be, 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 acknowledgment 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; readers 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 Owners, as well as Sta. Lucia Realty & Dev., Inc., 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) EHaCTA It is understood however, that upon the subsequent disposition by the co-venturers of the saleable lots and club shares 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, the aforesaid sale of the lots 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. Likewise, said sale of the club shares by any of the parties shall be subject to documentary stamp tax under Section 176 of the same Tax Code. Finally, said sales shall also 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 Assistant Commissioner Legal Service