BIR Ruling [DA-097-01]

May 28, 2001 BIR RULING [DA-097-01] 22 (B), 24/27 (A), 196, 57 (B) DA-084-2001 Titan-Ikeda Construction & Development Corporation 6/F Fortune Bldg., 160 Legaspi St. Legaspi Village, Makati City Attention: Mr . Jerry T . Yao President Gentlemen : This refers to your letter dated March 29, 2000 requesting for a ruling on the exemption from capital gains tax and documentary stamp tax relative to your joint venture agreement executed with Mesdames Theresa V. Sapinoso, Ma. Rosario L. Valero and Librada I. Valero (Owners). aESIDH Documents submitted disclosed that the above-named persons are the registered and absolute collective owners of a parcel of land located at Quintos St., Barangay Poblacion, Makati City covered by Transfer Certificate of Title No. 150618 issued by the Registry of Deeds for Makati, Metro Manila; that Titan-Ikeda Construction & Development Corporation (Titan-Ikeda) is a bona fide construction company and real estate developer qualified to undertake subdivision and high-rise development projects on its own or in partnership with landowners or other investors; that the owners desire to develop on the said parcel of land a 12-storey office and residential condominium building (the Project); that Titan-Ikeda offered to finance and construct said project; and that the owners and Titan-Ikeda entered into a Joint Venture Agreement dated October 27, 1999 in which they agreed on the following: "xxx xxx xxx "SEC. 1. THE PROJECT "1.1 The PROJECT shall be known as ONE VALERO SQUARE. "1.2 The PROJECT shall consist of twelve (12) stories to be erected on a portion of aforesaid parcel of land which portion consists of 282 square meters area. . . .; "SEC. 2. BASIC CONTRIBUTIONS OF THE PARTIES "2.01 The OWNER shall contribute to the JOINT VENTURE the LAND as specified in Annex "B" hereof including the completed excavation and concrete pouring on the basement and shall perform its undertaking set forth in Section 4 hereof; "2.02 The DEVELOPER shall develop the PROJECT, provide the working capital and the equipment, machinery and personnel for the works and perform its undertakings set forth in Section 5 hereof; "xxx xxx xxx" "SEC. 6. CONSIDERATIONS FOR THE PARTIES "6.01 As consideration for its LAND, the OWNER shall be entitled to the 8th, 9th and 10th floors and three parking spaces of the PROJECT; "6.02 As consideration for its services the DEVELOPER shall be entitled to the remaining floors and parking spaces of the PROJECT; "6.03 The parties or their assigns, heirs or buyers shall be entitled to the use and enjoyment of all common areas and facilities provided that they share the expenses for their maintenance or costs to the extent of their shares in the commercial/residential areas; CTEDSI "xxx xxx xxx" In reply, please be informed as follows: 1. 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. 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 Owners and Titan-Ikeda is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997, However, the construction services rendered by Titan-Ikeda shall be subject to VAT. 2. The allocation of saleable area of the project between the Owners and Titan-Ikeda in consideration of their respective contributions, as stipulated in the 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, 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 rates under Sections 24, 27(A) or 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. Furthermore, 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 property whichever is higher. Moreover, the said sale shall also be subject to value-added tax. AHDaET 3. The Partition Agreement whereby the Owners and Titan-Ikeda 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 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.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group