BIR Ruling [DA-096-02]

May 22, 2002 BIR RULING [DA-096-02] 22 (B), 27 (A), 196, 57 (B) DA-155-2001 SGV & Co . 6760 Ayala Avenue Makati City Attention: Atty . C . P . Noel Tax Division Gentlemen : This refers to your letter dated October 15, 2001 stating that Nueva Ecija Land Co., Inc. (Owner) a corporation duly organized and existing under and by virtue of Philippine laws, is the absolute and registered owner of several parcels of land situated in the City of Cabanatuan, Province of Nueva Ecija with an aggregate of 155 hectares covered by Transfer Certificates of Title (TCT) Nos. 87170 to 87814; that the said parcels of land are already planned and designed by the Owner into a golf course, high-end to middle class residential subdivision, and commercial subdivision, and partly developed by the Owner into a project known as LAKEWOOD CITY; that the Owner entered into a "Development Agreement" with Sta. Lucia Realty and Development Inc. (Developer) in which they agreed that the Developer would assume the completion of the development of Lakewood City; and that both parties have agreed on the following: xxx xxx xxx "1. MASTERPLAN AND ACTUAL DEVELOPMENT DISCLOSURES OF OWNER 1.a. The property of the OWNER shall be developed into the following components: 1.a.1. High-End Residential Subdivision -38 has. 1.a.2. Golf Course and Clubhouse -64 has. 1.a.3. Middle Cost Residential Subdivision -35 has. 1.a.4. Commercial Block 1.a.5. Roads/Common Areas -7 has. 155 has. 1.b The Owner has developed portions of high-end residential subdivisions, particularly Pods A, B, C, D & E and portion of the golf course. xxx xxx xxx 2. DEVELOPMENT OF THE HIGH END RESIDENTIAL SUBDIVISION xxx xxx xxx "2.a. Since the titles to the subdivision lots have been segregated and mortgaged to RCBC, the Developer has the option to work on the alteration of Pods B, C, and D. All expenses needed in the procurement of the Alteration Permit shall be for the account of the Developer; xxx xxx xxx "2.c. The Developer, whenever possible, shall comply with and follow the design of the residential subdivision as initiated by the Owner or as altered as agreed upon by the parties; xxx xxx xxx "2.e. The Owner agrees to compensate the Developer in the form of residential lots constituting 57.5% of the total saleable are while the remaining 42.5% shall form part of the share of the Owner; "2.f. Since the Owner has already spent for the initial development of the high-end residential subdivision, the Developer agrees to reimburse the total development cost incurred by the Owner in the form of high-end residential lots with an aggregate area of 7,572 sq. m. in addition to the 42.5% share of the Owner as stated in par. 2e. xxx xxx xxx "4. DEVELOPMENT OF THE MIDDLE-COST RESIDENTIAL SUBDIVISION "4.a. For the planning and development of the said area into a middle cost residential subdivision all at its expense, the Developer is entitled to 57.5% of the net saleable area of the project. The remaining 42.5% shall form part of the share of the Owner; SCHIcT xxx xxx xxx "4.d. The Developer shall secure and pay for all the necessary licenses and permits, such as Development Permit from LGU, License to Sell from HLURB, Approved Subdivision Plan from the Bureau of Lands and such other permits from government agencies that regulate or control or may hereinafter regulate or control the construction and development of residential subdivisions; "4.e. The Developer shall secure and pay for all the necessary permits and license from the government agencies concerned including the procurement of an ECC for the middle cost Residential Subdivision. "5. DEVELOPMENT OF COMMERCIAL BLOCK xxx xxx xxx "5.b. For the planning and development of the said commercial block, the Developer is entitled to receive 50% of the net saleable area of the entire commercial block, while the remaining 50% shall become the share of the Owner. xxx xxx xxx "5.d. The Developer shall secure and pay for all the necessary permits and license from the government agencies concerned including the procurement of an ECC for the Commercial Subdivision (except for the DAR Clearance and Exemption Clearance). "6. MARKETING PROVISIONS "6.a. The marketing of the entire project, which includes the high-end residential subdivision, golf club shares, and middle cost residential subdivision and commercial block, shall be undertaken by an exclusive marketing firm to be appointed by the parties at a marketing fee of 12% based on net sales (defined as Gross Selling Price less 10% VAT). If the Owner is able to refer buyers to said marketing firm, the Owner is entitled to 5% commission. xxx xxx xxx In view of the foregoing, you now request for confirmation of your opinion that: 1. The Development Agreement between the Owner and the Developer will not give rise to a taxable joint venture within the meaning of Section 22(B) in relation Section 27(A) of the Tax Code of 1997. 2. The allocation of saleable lots between the Owner and the Developer 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 the Owner or Developer 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 NIRC, and to the creditable expanded withholding tax under Revenue Regulation No. 2-98. 3. The allocation of saleable lots between the Owner and Developer is not subject to Documentary Stamp Tax imposed under Section 196 of the NIRC because the allocation is made without monetary consideration and is not in connection with the sale. In reply, please be informed as follows: 1. 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. 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 Owner and the Developer is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. 2. The Owner's assignment to the Developer of its corresponding share of 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 allocation is a mere return of capital that each has contributed and therefore, not a taxable event. The transfer is also not subject to VAT, since the transfer is not in the course of business but a capital contribution. 3. However, 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 regular income tax rate under Section 27(A) of the Tax Code of 1997, and to the creditable withholding tax under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001. 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. DacTEH The agreement whereby the Owner 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. 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 will be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Acting Assistant Commissioner Legal Service