BIR Ruling [DA-113-99]

February 25, 1999 BIR RULING [DA-113-99] Communities (Cagayan), Inc. Suite 5, 3rd Flr. Jofelmar Bldg. Mortola cor. J. Borja Sts. Cagayan de Oro City Attention: Ms. Cynthia A. Javarez Head-Tax Department Gentlemen : This refers to your letter dated January 21, 1999 requesting for the issuance of a certification that the Joint Venture Agreement executed by and between First Megablock Properties Development, Inc. (FMPDI) and Communities (Cagayan), Inc. (CCI) is not a taxable event and is not subject to capital gains, income and expanded withholding taxes under Section 27 (A) of the Tax Code of 1997. It appears that FMPDI is the absolute owner of five (5) contiguous parcels of land situated at Barrio Lumbia, Cagayan de Oro City and covered by Transfer Certificates of Title No. T-112695, T-112696, T-112697, T-112698 and T-112699 all issued by the Registry of Deeds of Cagayan de Oro City; that said parcels of land have an aggregate area of 375,347 sq.m.; that CCI is a corporation engaged in the business of land development such as conversion of any land into subdivision projects, as well as construction of houses, particularly in the Cagayan de Oro City area; that a Joint Venture Agreement was executed by and between FMPDI and CCI for the development of the subject properties into a residential subdivision project; that CCI will contribute its technical know-how on subdivision development and will shoulder the cost of the development, including other related expenses; that the sharing of FMPDI and CCI shall be on a 10%, 90% ratio in favor of CCI; and that the 10% ratio shall correspond to the saleable commercial section of the subdivision and the 90% ratio shall correspond to the saleable residential area on the approved subdivision plan, which parties will subsequently allocate and adjudicate between themselves. 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. HIACac 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 FMPDI and CCI 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 FMPDI and CCI 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) This time, the said sale shall be subject to documentary stamp tax under Section 196 of the Tax Code of 1997, based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6 (E) of the Tax Code of 1997. CacISA 3. The Partition Agreement whereby FMPDI and CCI 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) 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. cADTSH Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue