BIR Ruling [DA-103-04]

March 8, 2004 BIR RULING [DA-103-04] 22 (B) DA-192-2001 Maribel Pasco-Quejado 1034 Deli St., Crispin Village Dela Paz, Pasig City M a d a m : This refers to your letter dated February 3, 2004 requesting for an opinion on the tax consequences of the Joint Venture Agreements executed by your clients, San Mateo Heights Realty Corporation and Kalaw-Ledesma, Inc. (Owners) with Sta. Lucia Realty and Development, Inc. (the Developer). Based on your representations, as well as from the documents submitted, the facts are as follows: 1. Sometime on January 2000, San Mateo Heights Realty Corporation entered into a Joint Venture Agreement (First JVA) with the Developer for the development of its 10,000 sq.m. property identified as Lot F located at Brgy. Cupang, Antipolo, Rizal and covered by Transfer Certificate of Title No. 206872; 2. Another JVA (Second JVA) was executed on the same day by San Mateo Heights Realty Corporation and Kalaw-Ledesma, Inc. with the Developer for the development of their 10,000 sq.m. properties identified as Lot E-1 and E-2 also located at Brgy. Cupang, Antipolo, Rizal and covered by several TCTs; 3. In accordance with the aforestated JVAs, the Developer has caused the development of the properties and the project is now in the process of segregation, and transfer of the corresponding share of the Developer in the resultant titles representing its 60% share of the project in the First JVA and 50% share in the Second JVA; and 4. A Memorandum of Agreement and a Deed of Assignment were executed by the Owners with the Developer, to transfer the 60% and 50% share of the Developer in the resultant subdivision lots pursuant to the First and Second JVA; that you now request for an opinion on the tax consequences of the following transaction: 1. What would be the taxes involved when the Owners transfer to the Developer its 60% and 50% shares of the total saleable lots for its development of the two projects. Would there be capital gains and documentary stamp taxes (and if there is, how much?) when the parties eventually execute a Memorandum of Agreement and Deed of Assignment for the resultant lots in the project? 2. What would be the taxes involved when the parties eventually sell their respective share of saleable lots to third party? In reply, please be informed that 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. 29 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 as additional income tax lien. 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 the Owners and the Developer is not subject to income tax under Section 27 of the Tax Code of 1997. The assignment by the Owners to the Developer of its corresponding share of the resultant 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 aforestated assignment is a mere return of capital contribution, and therefore not a taxable event. ( BIR Ruling No. DA-192-2001 dated October 17, 2001 ) HaSEcA The Memorandum of Agreement and the Deed of Assignment, whereby the Owners and the Developer will allocate unto each other their share in the resultant subdivision lots, 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 made without monetary consideration and is not in connection with a sale. The allocation is made merely to segregate the resultant lots between the parties, as the return of the capital which each has contributed. However, the acknowledgment to said Memorandum of Agreement and Deed of Assignment 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 ) The transfer is also not subject to VAT since under Section 105 of the Tax Code of 1997, any person 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. Hence, by contributing the parcels of land, the Owners, neither sells, barters, exchanges goods, property nor renders service to be subject to VAT. ( 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. 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 properties, whichever is higher. Furthermore, the said sale shall likewise be subject to VAT. 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service