Jose A. Oliveros

February 22, 2007 BIR RULING [DA-115-07] Sec. 22 (B); DA-240-2001 dtd 11/16/01 Jose A. Oliveros Attorney and Counselor-at-Law 52 Kamagong Road, Pilar Village Las Pias City S i r : This refers to your letter dated January 30, 2007, in behalf of your client, BONITA DEL MAR REALTY DEVELOPMENT CORP., requesting a ruling on the tax consequences and/or tax liabilities of parties under a joint venture agreement. It appears that BONITA DEL MAR REALTY DEVELOPMENT CORPORATION (Bonita, for short) entered into a Joint Venture Agreement (JVA) with AURORA D. MONTANO, for the construction of a high-rise residential condominium complex to be situated at Brgy. Capipisa, Sitio Mabangos, Tanza, Cavite; that Bonita is a domestic stock corporation, 100% of its capital stock is Filipino-owned; that the primary purpose of which, among other things, is to own, hold, improve, develop, manage and subdivide any real estate so acquired; that last January 23, 2007, BONITA entered into a JVA with Aurora Montano for the development of two (2) parcels of land which the latter own, situated in Brgy. Capipisa, Sitio Mabangos, Tanza, Cavite, that JVA is for the construction of a high-rise condominium complex; that out of the JVA, Bonita will derive 60% of the gross saleable area of all units including the parking areas, while the remaining 40% shall pertain to the land owner Montano; hence, the following questions, to wit: a) What taxes should the joint venture partners pay before the Register of Deeds of Cavite can issue individual CCTs in their respective names on the units allocated to them under their 60%-40% sharing scheme? TIaCAc b) Is the sale by any of the joint venture partner to a third parties of the condominium unit or units titled in their name subject to capital gains tax (CGT) and to the expanded value added tax (EVAT) or to the expanded withholding tax (EWT)? c) Are the parties liable for the payment of any other tax on the proceeds of the sale of the condominium units allocated to them under the above-stated sharing scheme? 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. 929 amended the definition of the taxable corporation so 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. CIAacS 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 Owner and the Developer is not subject to income tax under Section 27 of the Tax Code of 1997. The assignment by the Owner to the Developer of its corresponding share of the net proceeds of sale of 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) The Memorandum of Sharing whereby the Owner and the Developer will allocate unto each other their shares in the total saleable lots net proceeds of the sale, 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 saleable area between the parties, as the return of the capital which each has contributed. However, the acknowledgement to said Memorandum of Sharing 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 its parcel of land, the Owner, neither sells, barters, exchanges goods, properties nor render services 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) a) In fine, the joint-venture partners will not be liable to pay any tax in the transfer of the title to their individual names in consonance with their 60%-40% sharing scheme before the Office of the Register of Deeds-Cavite will transfer the CGT in their names as the assignment of the same is a mere return of capital contribution, and therefore not a taxable event. TCaADS b) 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 or capital gains tax under Section 27 (D) (5), as the case may be. c) 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 property, 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 as null and void. aSTECI Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service