BIR Ruling [DA-107-99]

February 18, 1999 BIR RULING [DA-107-99] Mermolyna Development Corporation 101 I. Lopez St. Mandaluyong City Attention: Mr . Elmo C . Pillas VP-Operations Gentlemen : This refers to your letter dated October 12, 1998 requesting for the issuance of a certification that the Joint Venture Agreement executed by and between Mermolyna Development Corporation (MDC) and Spouses Elionor and Emma Pillas (Owners) is not a taxable event and is not subject to income/expanded withholding tax under Section 27(A) of the Tax Code of 1997. It appears that MDC is a domestic corporation engaged in the business of acquiring, developing and selling real estate; that the Owners are the absolute owners of a parcel of land located at Mandaluyong City covered by Transfer Certificate of Title No. 12542 with an area of 576 sq.m.; that on September 30, 1998 (revised on January 7, 1999) a Joint Venture Agreement was executed by and between MDC and the Owners for the development of the said parcel of land and the construction of a seven-storey residential condominium building thereon; and that the parties have agreed to share in the saleable units as follows: Ten Percent (10%) in favor of the Owners and Ninety Percent (90%) in favor of the Developer (MDC). 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. It is to be emphasized, however, that 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 Agreement entered into by and between MDC and the Owners is not subject to the regular income tax under Section 27(A) of the Tax Code of 1997. 2. The allocation of saleable lots between MDC and the Owners 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 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 lots allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax under Section 27(A) of the Tax Code of 1997 and to the creditable withholding tax under Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, as further amended by Revenue Regulations No. 2-98. (BIR Ruling Nos. 274-92 dated September 30, 1992; 010-96 dated January 23, 1996; BIR Ruling Nos. DA065-97 dated February 10, 1997; DA286-98 dated June 29, 1998) 3. The Partition Agreement whereby MDC and the Owners will allocate unto each other their share in the saleable 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, income tax and any withholding tax because the allocation is made without monetary consideration and is not in connection with a sale. But instead, the partition is made merely to segregate the saleable lots between the parties, as the return of the capital which each contributed. Moreover, Section 185 of the Revised Documentary Stamp Tax Regulations (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 Partition Agreement is without consideration and is not in connection with a sale made to the residential subdivisions, no income was generated and a fortiori , no creditable withholding tax and documentary stamp tax are payable and collectible. However, the acknowledgment 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 061-99 dated February 5, 1999) LLphil 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 will be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue