BIR Ruling [DA-096-05]

March 29, 2005 BIR RULING [DA-096-05] 22 (B) DA-488-98 ASB Realty Corporation ASB Center, 114 Benavidez St. Legaspi Village, Makati City Attention: Atty. Rolando P. Domingo Senior Vice-President Gentlemen : This refers to your letter dated March 10, 2005 stating that: ASB Realty Corporation (ASB) is a corporation organized and existing under and by virtue of the laws of the Philippines, with principal office at the ASB Center Building, 114 Benavidez Street, Legaspi Village, Makati City, while Malayan Insurance Co.,Inc. (MICO) is a corporation organized and existing under and by the virtue of the laws of the Philippines with principal office at the Yuchengco Tower, 500 Q. Paredes Street, Binondo, Manila. ASB and MICO entered into a Memorandum of Agreement (MOA) on April 30, 2002 and the said MOA was approved by the Securities and Exchange Commission in its Order dated July 29, 2002. The MOA originates from the Joint Project Development Agreement dated November 9, 1995 wherein MICO contributes the lot and ASB defrays the cost of construction of the ASB Malayan Tower Project (now The Malayan Plaza) located at ADB Avenue corner Opal Road, Ortigas Center, Pasig City and they agreed that they will allocate the net saleable area of the building in proportion on to their capital investments on the Project. Under the MOA, since ASB was unable to complete the project, MICO undertakes to assume and complete the ASB Malayan Tower Project (now The Malayan Plaza),and as a return of the parties capital investments in the project, they agreed that each shall be entitled to such portion of the saleable area of the project that their respective contributions bear to the actual costs of the project. Based on the provisions of the MOA, you now request for a ruling to confirm your opinion that: 1. The MOA is in the nature of a joint venture between ASB and MICO for the construction and completion of ASB Malayan Tower Project (now The Malayan Plaza) and will not create a taxable joint venture within the meaning of Section 22(B), in relation to Section 27(A) of the Tax Code of 1997. 2. The allocation of the units and issuance of the corresponding Condominium Certificates of Title by the Registry of Deeds of Pasig City directly in the name of the parties representing interest in the project as stipulated in the MOA is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax because the allocation is mere return of capital contribution and therefore not a taxable event. 3. The allocation of the units is also not subject to documentary stamps tax imposed under Section 196 of the Tax Code of 1997 because the allocation is not in connection with a sale and merely made to segregate their share in the project. 4. The transfer/allocation is also not subject to VAT since under Section 105 of the Tax Code of 1997, only persons 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 Section 106 to 108 of the same Tax Code. In reply, please be informed that: 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 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 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 ASB and MICO is not subject to income tax under Section 27 of the Tax Code of 1997. 2. The allocation of the condominium units/parking spaces and issuance of the corresponding Condominium Certificates of Title by the Registry of Deeds of Pasig City to the co-venturers, directly in their names representing their respective shares or participating interest in the project as stipulated in the MOA and its amendments thereto, 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 contribution. (BIR Ruling No. DA-488-98 dated November 16, 1998) 3. The Partition Agreement whereby ASB and MICO will allocate unto each other their share or participating interests in the project, 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 not in connection with a sale. The allocation is made merely to segregate their share or participating interests in the project, 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) 4. The transfer is also not subject to VAT since under Section 105 of the Tax Code of 1997, only persons 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. (BIR Ruling No. DA-240-2001 dated November 16, 2001; BIR Ruling No. DA-115-2001 dated September 5, 2001) 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 or capital gains tax under Section 27(D)(5), 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 property, whichever is higher. Furthermore, the said sale shall likewise be subject to VAT. IDEHCa 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 shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group