BIR Ruling [DA-101-04]

March 8, 2004 BIR RULING [DA-101-04] Spouses Crisanto & Editha Gualberto 130 Evangelista Street BF Homes, Paraaque City S i r : This refers to your letter dated February 23, 2004 stating that Spouses Crisanto and Editha Gualberto (Landowners) are the registered owners of six (6) adjacent parcels of land located in Batangas covered by TCT Nos. T-91331, T-91325, T-91332, T-91326, T-91330 and T-91329 with an aggregate area of 240,316 square meters issued by the Registry of Deeds for the Province of Batangas; that on the other hand, Pueblo Nino Development, Inc. (Developer) is a domestic corporation with principal office address at the 1105 Park Trade Center, 1716 Investment Drive, Madrigal Business Park, Ayala Alabang, Muntinlupa City; that the Developer has the experience, personnel, equipment and capital necessary to develop the aforesaid properties; that on October 21, 2003, a Joint Venture Agreement (JVA) was entered into by and between the Landowners and Developer for the development of the aforesaid properties into a residential subdivision; and that from the total number of subdivision lots in the project, the parties agree to share in the following proportion: (i) The Developer shall acquire the rights, title and interests in and to such number of individual lots having an aggregate value equal to eighty percent (80%) of the aggregate fair market value of all the individual lots; and (ii) The Landowners shall acquire the rights, title and interests in and to such number of individual lots having an aggregate value equal to twenty percent (20%) of the aggregate fair market value of all the individual lots. Based on the foregoing representations, you now request clarification on the tax implication relative to the assignment of the saleable lots pursuant to the abovementioned JVA as to whether it is not subject to income tax/creditable withholding tax, capital gains tax and the corresponding documentary stamp tax. In reply thereto, please be informed that 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. It is to be emphasized, however, that P.D. 929 excluded joint venture formed for the purpose of undertaking construction projects from the definition of the term "Corporation" because (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. 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 holds that the Joint Venture Agreement entered into by the above-named Landowners and Developer, for the development of the aforesaid properties into a residential subdivision is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997. Moreover, the transfer of the property by the Landowners to the Developer pursuant to their JVA is not subject to the capital gains tax and to the documentary stamp tax under Sections 24(D)(1) and 196 of the Tax Code of 1997. However, the certification is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the said Code. aDHCAE However, the co-venturers are separately subject to the regular individual and corporate income taxes on their respective taxable income during each taxable year derived by them from the aforesaid construction project. Moreover, the Joint Venture Agreement entered into by and between the Landowners and Developer is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the Tax Code of 1997. However, the sale of the said real property shall be subject to the documentary stamp tax under Section 196 of the said Code. Moreover, the allocation and distribution of their respective shares in the project consisting of developed lots and the housing structures built thereon in consideration of their respective contributions, as stipulated in the Joint Venture Agreement is not a taxable event and is not subject to income tax, withholding tax, value-added tax and documentary stamp tax because the allocation is a mere return of capital that each has contributed. ( BIR Ruling Nos. 10-96 dated January 23, 1996 ; DA065-97 dated February 10, 1997 ; DA286-98 dated June 29, 1998 ) Furthermore, since the partition to be executed by the parties allocating and distributing between them their respective shares in the project in exchange for their respective contributions is without monetary consideration but merely acknowledges and confirms the title and ownership of the above-named Landowners and the Developer, the same is not subject to the value-added tax, income/creditable withholding tax nor to the documentary stamp tax respectively imposed under Sections 106, 24(c), 27(A) as implemented by Revenue Regulations No. 2-98, as amended, and 196 all of the Tax Code of 1997. However, the sale of the respective share of the Landowners and/or the Developer of the aforesaid properties shall be subject to the creditable withholding tax, VAT and documentary stamp tax pursuant to Revenue Regulations No. 2-98, as amended, Sections 106(A) and 196 all 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, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service