BIR Ruling [DA-100-03]

March 31, 2003 BIR RULING [DA-100-03] 22 (B) DA-065-97 & -027-2002 Villaraza & Angangco Law Offices 5/F, LTA Bldg., 118 Perea St. Legaspi Village, Makati City Attention: Atty. Ma. Victoria O. Llenos-Flauta Gentlemen : This refers to your letter dated March 4, 2003 requesting in behalf of your client, Palladium Properties, Inc. (PPI) , for confirmation of your opinion that the assignment/transfer of its four (4) floors/units of the MDB Bank Building (now known as the "Blue Cross Center") to Mindanao Development Bank (MDB) is exempt from any and all taxes considering that the said transfer and registration in MDB's name do no yet involve a transfer to a third person. It is represented that PPI is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines and the registered owner of a parcel of land with an aggregate area of approximately Two Hundred Sixty Four (264) square meters located at the corner of Makati Avenue and P. Burgos Street, Makati City, covered by Transfer Certificate of Title (TCT) No. 202889 ("Property" for brevity); that MDB is a development banking institution, duly organized and existing under and by virtue of the laws of the Republic of the Philippines; that on July 8, 1996, PPI and MDB executed a Joint Venture Agreement ("JVA" for brevity) for the construction of a commercial condominium building ("Project" for brevity) on the Property; that the JVA provides for the following terms and conditions: 1) PPI will contribute the Property while MDB will finance the Project in the amount of Twenty Five Million Eight Hundred Sixty Five Thousand One Hundred Eighty Two Pesos (P25,865,182.00); 2) PPI, as the developer, will also contribute its expertise in, and take charge of, and handle the design, construction, administration, management and development of the Project; 3) After the Project is completed, ownership over the different floors/units therein, including the rights to the parking spaces, shall be apportioned between PPI and MDB as their respective shares in the joint venture undertaking; and 4) MDB will acquire ownership over four (4) floors of the condominium building namely, the Lower Ground, Upper Ground, Second and Third Floors ("Floors"); that upon completion of the Project in 1999, the Condominium Certificates of Title to all the floors/units were issued in the name of the developer, PPI, including the Floors; and that on February 28, 2003, PPI and MDB executed a Deed of Conveyance whereby PPI assigned to MDB the Floors in return for its financial contribution to the Project pursuant to the JVA. In reply, please be informed as follows: 1) Pursuant to Section 22(B) of the Tax Code of 1997, the term "corporation" shall include 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. Such being the case, the joint venture that was formed by virtue of the JVA executed by and between PPI and MDB for the construction of a condominium building is not subject to the corporate income tax under Sec. 27(A) of the Tax Code of 1997. However, the co-venturers are separately subject to the regular corporate income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. Considering the foregoing, the joint venture of PPI and MDB for the construction and development of the Project will not create a taxable joint venture within the meaning of Sec. 22(B), in relation to Sec. 27(A) of the Tax Code of 1997. 2) The allocation of their specific floors or units therein and parking slots in the Project in consideration of their contribution in the Project, as stipulated in the JVA, and the issuance of the corresponding condominium Certificate of Title by the Registry of Deeds of Makati City to PPI representing the respective shares or participating interests of PPI and MDB in the Project as stipulated in the JVA is not a taxable event. The same is therefore, not subject to income, withholding, value-added and documentary stamp taxes. Nonetheless, the acknowledgment to the Deed is subject to documentary stamp tax under Section 188 of the Tax Code of 1997. CSIcTa 3) It is only upon sale or disposition of the units allocated to PPI and MDB to third parties that the gain realized by the parties in the said transaction will be subject to the regular 32% income tax under Sec. 27(A) of the Tax Code of 1997, the creditable withholding tax under Revenue Regulations No. 2-98, as amended and the value-added tax under Section 106 of the Tax Code of 1997. The transfer of the said properties to third parties shall likewise be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 based on the consideration or the fair market value of the property being transferred, whichever is higher. 4) Section 185 of the Revised Documentary Stamp Tax (DST) Regulations No. 26 provides that "conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable." Accordingly, since the aforementioned Deed of Conveyance and Deed of Partition are without consideration and are not in connection with a sale made to PPI and MDB and the condominium corporation, respectively, no income was generated, and a fortiori, no income, creditable withholding, value-added and documentary taxes are payable and collectible. However, the acknowledgment to said Deed of Conveyance and Deed of Partition are subject to DST of P15.00 pursuant to Section 188 of the Tax Code of 1997. In view thereof, the Deed of Conveyance executed by PPI to convey the Floors to MDB in consideration of MDB's contributions in the Project, considering that the said deed is without monetary consideration, is not subject to income, withholding, value-added and documentary stamp taxes. 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, and/or any of the requirements set forth in this letter are not complied with, then this ruling shall be considered null and void. ( BIR Ruling No. DA-065-97 dated February 10, 1997 and BIR Ruling No. DA-027-2002 dated February 26, 2002 ) Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service