BIR Ruling [DA-117-02]

July 16, 2002 BIR RULING [DA-117-02] 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 27, 2002 quoted as follows: "1. On November 14, 1996, Sta. Lucia Realty & Dev., Inc. entered into a Development Agreement with Guaranteed Homes, Inc. (the lot owners) for the development of its properties located at Cabitaugan, Subic, Zambales, with an aggregate area of 1,132,551 sq.m., more or less, into a golf course, a beach resort and a residential estate with a sharing of 60-40 of the saleable area, golf shares and beach shares. Included in the development is the lot owned by Guaranteed Hotels, which subsequently issued a Board Resolution confirming the agreement and authorizing the JV, . . .; "2. The said joint venture was subsequently amended on September 6, 1999 deleting the development of a golf course, . . .; "3. Pursuant to the joint venture agreement, the parties formed the Club Morocco Beach Resort and Country Club, Inc. with an authorized capital stock of 4,000 no par value shares, . . . ; "4. The idea for the selling of the subdivision lots, was that for every lot sold, there shall be one club share assigned to the lot, which is either owner by the OWNER or DEVELOPER; "5. The Club (Club Morocco Beach Resort and Country Club, Inc.) entered into an agreement with Sta. Lucia Realty & Dev., Inc. (the DEVELOPER) wherein in exchange for the stipulated development (hotel, villas, and beach facilities and its amenities), the club shall issue 60% of the total unissued club shares to the developer, Sta. Lucia Realty & Dev., Inc., consisting of 1,800 shares of stock . . .; "6. On October 12, 2001, as a requirement of the registration statement of the Club with SEC, Guaranteed Homes, Inc. and Guaranteed Hotels, Inc. executed a Memorandum of Understanding with Club Morocco Beach Resort and Country Club, Inc. wherein the 2 corporations agreed to assign to the club three (3) parcels of land to the club, consisting more or less 30,322 sq.m. and covered by three (3) titles particularly T-15265, T-11391 and T-15592 in exchange for club shares, . . .; "7. On October 12, 2001, Guaranteed Homes, Inc. executed an Agreement to Assign two (2) lots to the club covered by TCT No. 15265 and TCT No. 15592 in exchange for 100 Class "A" shares; "8. On October 12, 2001 Guaranteed Hotels, Inc., executed an Agreement to Assign one (1) lot to the club covered by TCT No. T-11391 in exchange for 460 Class "A", 640 Class "B"; "9. The main bulk of the subdivision project is still in the consolidation and subdivision, but eventually, the owners would execute a Deed of Assignment of the lots in favor of the developer (Sta. Lucia Realty) comprising the latter's share of the subdivision project, in exchange for its development; "We would like to request for an opinion or ruling to the tax consequences of the following transaction: "1. What would be the taxes involved when Guaranteed Hotels, Inc., and Guaranteed Homes, Inc., assign to Club Morocco Beach Resort and Country Club, Inc. the land with an area of 30,322 sq.m. covered by TCT Nos. T-15265, T-11391 and T-15592 in exchange for club shares of the Club; "2. What are the taxes involved when Guaranteed Homes, Inc./Guaranteed Hotels, Inc. assign the corresponding share of subdivision lots to Sta. Lucia Realty & Dev., Inc. in exchange for the latter's development efforts; "3. When the Club issues the shares to the lot owners (Guaranteed Hotels, Inc. and Guaranteed Homes, Inc.) in exchange for land; and when the Club issues the shares to Sta. Lucia Realty & Dev., Inc. (being the developer), what are the taxes involved and would have to be paid; "4. What would be the tax liabilities of each party, when they sell their corresponding club shares and when they sell their respective share of subscription lots to third party (buyer)." 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 among Sta. Lucia Realty and Guaranteed Homes, Inc. are not subject to income tax under Section 27 of the Tax Code of 1997. The assignment by Guaranteed Homes, Inc. and Guaranteed Hotels, Inc. to Sta. Lucia Realty of its 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 Guaranteed Homes, Inc./Guaranteed Hotels, Inc. 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 import goods shall be subject to VAT imposed in Sections 106 to 108 of the same Tax Code. Hence, by contributing the parcel of land, Guaranteed Homes, Inc. and Guaranteed Hotels, Inc. 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 by Club Morocco Beach Resort and Country Club of its shares to Sta. Lucia Realty and to Guaranteed Homes, Inc. and Guaranteed Hotels, Inc. for their development efforts and contribution of lots, respectively, is exempt from the payment of regular income tax/creditable withholding tax. Inasmuch as Guaranteed Homes, Inc. and Guaranteed Hotels, Inc. did not cede their ownership or interest over their parcels of land when they contributed a portion of their landholdings to Club Morocco Beach Resort and Country Club 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