BIR Ruling [DA-084-01]

May 10, 2001 BIR RULING [DA-084-01] 22 (B), 27 (A), 196, 57 (B) DA-017-2000 SGV & Co . 6760 Ayala Avenue Makati City Attention: Atty . C . P . Noel Tax Division Gentlemen : This refers to your letter dated February 20, 2001 stating that Mesdames Maria Gloria Pineda-Piano, Justina Torrella Pineda, Mary Ann Pineda-Reynoso and Antonia P. Tomas are the co-owners of several parcels of land with an aggregate area of Fifty Seven Thousand Five Hundred Forty Seven (57,547) square meters; that the aforestated property is situated in F. Imperial St., Legaspi City, Albay and is covered by Transfer Certificates of Title (TCT) Nos. 32740, 32741, 32742, 32603, 32604, 32605, 40220, 41181, 41182, 41186, 41188, 32606, 32606, 32608, 32609, 32611, 39984, and 41187 (Subject Property); that Landco Pacific Centers, Inc. (Landco) is a corporation duly organized and existing under the laws of the Philippines; that Landco has the managerial expertise, experience, organization and financial resources to develop the subject property to its highest and best use; that the above-mentioned parties entered into a "Development Agreement" and "Distribution Agreement" on August 3, 1998 for the construction and development of the subject property into a central district to be known as the "Legaspi Commercial Park"; that the aforesaid parties agreed on the following: "xxx xxx xxx "1. OBLIGATION OF THE LANDOWNERS "1.1 The Landowners shall contribute the Subject Property for development by the Developer into a commercial subdivision under the following conditions: "a. covered by consolidated titles free from all liens, charges, and encumbrances, with all land ownership documents in order; "b. free from illegal occupants, squatters and / or tenants; "c. converted and classified for commercial land use; "d. the properties are not the subject of litigation and that there are no claims whatsoever; "e. any undisclosed adverse claims against the property raised after the date of signing of this Agreement shall be for the account of the LANDOWNERS. "2. OBLIGATIONS OF THE DEVELOPER "The DEVELOPER shall in turn contribute the following resources for development: "2.1. Overall Development Requirements for the Property which includes but not limited to the following: "a. Market Research and Business Planning "b. Market Planning "c. Architectural and Engineering Plans "d. All necessary government licenses and permits "e. Bidding and Awarding of Contracts "f. Site Physical Development "g. Negotiation and Contracting with Third Parties "h. Project and Construction Management "i. Organizational Development "j. Administrative Set-up "2.2. Necessary funding for the planning and overall real estate development such as the following: "a. All Planning and Administrative Cost "b. Land Development Costs "c. Costs of constructing standard first class community facilities and amenities with the plans and specifications and design standards as approved by the HLURB "d. Other working capital requirements "2.3. Management expertise and manpower for the full and effective implementation of the Development and Marketing Plan "Commercial Subdivision as used in this Agreement shall be defined as a well developed subdivision with a complete mix of elements primarily the commercial lots to be used for various office, financial service and business establishments. "As the Property will be developed well-planned commercial subdivision, basic first class amenities and facilities will include the following: "a. Concrete, curbs and gutters "b. Underground electrical system "c. Underground Drainage "d. 24 hour water system "e. Provisions for telecommunication facilities "f. Perimeter wall, if required "g. Lights "h. Gates, if required "2.4. That the DEVELOPER at its own expense shall survey and prepare the subdivision plans, engineering designs, and such other plans in accordance with the rules and regulations as required by LGU concerned, Housing and Land Use Regulatory Board, Bureau of Lands and such other government agencies that regulate or control or many hereinafter regulate or control the construction and development of commercial subdivisions; "2.5. The DEVELOPER shall secure and pay all the necessary licenses plus the cost of the required bond, permits, approval from the Local government, Bureau of Lands, City Government, HLURB, and all other government agencies having authority on commercial subdivision with full cooperation by the LANDOWNERS; "2.6. The DEVELOPER shall construct, finish and operate a first class, premier, clean and wholesome shopping center in the property stated in the Fourth Whereas clause within two (2) years from the execution of this Agreement. "xxx xxx xxx "4. DISTRIBUTION OF LOTS "4.1. The LANDOWNERS and the DEVELOPER hereby agree to distribute the subdivision lots on a 50%-50% basis of the net saleable area. Fifty (50%) percent of the net saleable area shall constitute the share of the LANDOWNERS while the other fifty (50%) percent shall pertain to the DEVELOPER. "xxx xxx xxx "9. MARKETING EXPENSE "9.1 The parties hereby appoint Landco Pacific Corporation represented by its marketing arm, The Landco Centers, Inc. as the exclusive marketing agent for the sale of all Subdivision Lots at Legaspi Commercial Park. For this purpose Landco Centers, Inc. shall be entitled to a marketing fee of ten percent (10%) of the Net Sales (defined as Gross Selling Price Less 10% VAT and discounts) for their services for the first 10 LANDOWNERS' LOTS of Phase I of the Project. The remainder LANDOWNERS' LOTS shall be subject to a marketing fee of eight percent (8%). With respect to the sale of LANDOWNERS LOTS in Phase II of the Project, Landco Centers, Inc. is entitled to receive the following marketing fees: "Fifty-five percent (55%) of the total number of LANDOWNERS' LOTS 10% marketing fee "Forty-five percent (45%) of the remaining number of LANDOWNERS' LOTS 8% marketing fee "xxx xxx xxx In connection therewith, you now request for confirmation of your opinion that: 1. "The Development Agreement and Distribution Agreement entered into between Landco and several landowners will not give rise to a taxable joint venture within the meaning of Section 22(B) in relation to Section 7(A) of the Tax Code of 1997; 2. "The allocation of saleable lots between Landco and the Landowners in consideration of their respective contributions as stipulated in the Development and Distribution 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 Landco or the landowners sell any saleable lots allocated to them to third parties, the gain that may be realized from such sale will be subject to the regular 32% corporate income tax under Section 27(A) of the Tax Code of 1997 and to the creditable/expanded withholding tax under Revenue Regulations No. 2-98; 3. "The allocation of saleable lots between Landco and the Landowners is not subject to 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 the sale." In reply thereto, please be informed that your opinion is hereby confirmed as follows: 1. Pursuant to Section 22(B) of the Tax Code of 1997, the term "corporation" included 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. P.D. No. 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 joint 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 Joint Venture entered into by and between the Landowners and the Developers is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. However, the construction service rendered by the Developer shall be subject to value-added tax (VAT). 2. The allocation of saleable area of the project between Landco and the Landowners in consideration of their respective contributions, as stipulated in the Development and Distribution 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. The co-venturers did not convey or transfer their ownership or interest over their parcels of land when they contributed the aforesaid landholdings to the joint venture but merely pooled their resources to a common fund. These pooled resources are co-owned by the joint venture partners. The said contribution constituted their respective capital contributions to the joint venture project, therefore, such contribution is not a taxable event that will give rise to the payment of 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 subsequent disposition by the co-venturers of the areas allocated to them and the gain that may be realized by them from such sale will be subject to the regular income tax rate under Section 24; Section 27(A); or Section 27(E) of the Tax Code of 1997, as the case may be, and/or to the creditable withholding tax under Revenue Regulations No. 2-98. Moreover, said 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. 3. The Partition Agreement whereby the Landowners and the Developer 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 area between the parties, as the return of the capital which each 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. This ruling is being issued on 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.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group