BIR Ruling [DA-116-02]

July 16, 2002 BIR RULING [DA-116-02] 22 (B), 27 (A), 196, 57 (B) DA-062-2002 Sta . Lucia Realty & Development, Inc . Ground Flr., State Financing Bldg. Ortigas Avenue, Mandaluyong City Attention: Atty . Miriam G . Daway Legal Counsel Gentlemen : This refers to your letter dated June 24, 2002 quoted as follows: "1. On September 4, 1995, Sta. Lucia Realty & Dev. Inc. entered into a Development Agreement with Francisco Dizon et. al., (lot owners) represented by Madeline D. Marfori for the development of their 160 has. properties located at Mandug, Davao City, into a golf course and a residential estate with a sharing of 60-40 of the net proceeds of the sale of subdivision lots and resultant golf shares in the club which shall be formed later by the same parties, with the same sharing of 60-40 in favor of the Developer. . .; "2. The lot owners later on formed a corporation known as Red Bank Realty Development Corporation and the titles of the lots subject of the joint venture agreement, were transferred in the name of the corporation. "3. But prior to the transfer of the titles in favor of Red Bank Realty, the lot owners together with the developer, pursuant to the said agreement, incorporated the Rancho Palos Golf & Country Club, Inc. which will eventually own and manage the golf course and its facilities with the authorized capital stock of 2,000 no par value shares. "4. The Club (Rancho Palos Golf & Country Club, Inc.) entered into an agreement with the developer wherein in exchange for the stipulated development (18-hole golf course and its amenities), the club shall issue 60% of the unissued portion of its capital stock or a total of 1,500 shares, for the developer, Sta. Lucia Realty & Dev., Inc., . . .; "5. On December 10, 1999, as a requirement of the registration statement of the Club with SEC, Red Bank Realty and Development Corporation, executed an Agreement to Assign the land area that were actually developed for the golf course and its facilities consisting more or less 733,500 sq.m. and covered by 10 titles particularly T-315I96-315204 and T-318313, . . .; "6. A Memorandum of Sharing was also executed to transfer the residential lots of Sta. Lucia Realty, comprising its 60% share in the residential subdivision. "We would like to request for an opinion or ruling on the tax consequences of the following transactions: "1. What would be the taxes involved when Red Bank Realty & Development Corporation assigns to Rancho Palos Golf & Country Club, Inc. its land with an area of 733,500 sq.m. in exchange for the 600 club shares of Rancho Palos Golf & Country Club, Inc. "2. What would be the taxes involved in the conveyance of subdivision lots to Sta. Lucia by Red Bank Realty, comprising the share of lots of the former as developer of the project? "3. What are the taxes involved when the Club issues the shares to land owner (Red Bank Realty Corp.) and to developer (Sta. Lucia Realty & Dev. Inc.) in exchange for development and when they (lot/owner/developer) eventually sells the club shares to the public;" 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 Sta. Lucia Realty and Francisco Dizon, et al, is not subject to income tax under Section 27 of the Tax Code of 1997. The assignment by Red Bank Realty and Development Corporation to Sta. Lucia Realty 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 ) The Partition Agreement whereby Red Bank Realty and Development Corporation and Sta. Lucia Realty will allocate unto each other their share in the saleable area, 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 Partition Agreement 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 parcel of land, Red Bank Realty and Development Corporation, neither sells, barters, exchanges goods, property nor renders 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 ) In the same manner, the conveyance of Rancho Palos Verdes Golf and Country Club, Inc. of its shares to Sta. Lucia Realty and Red Bank Realty and Development Corporation for their development efforts and contribution of lots, respectively, is exempt from the payment of regular income tax/creditable withholding tax. Inasmuch as Red Bank Realty and Development Corporation did not cede its ownership or interest over its parcels of land when it contributed its landholdings to Rancho Palos Verdes Golf and Country Club, Inc. for the reason that the above-mentioned transfer is merely pooling of resources to a common fund, said transfer is likewise not subject to regular income tax/creditable withholding tax. The transfer is also not subject to VAT, since the transfer is not in the course of business but a capital contribution. 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 disclosed 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