BIR Ruling [DA-118-04]

March 16, 2004 BIR RULING [DA-118-04] Filipinas Dravo Corporation 5th Floor, Aurora MILESTONE Building 1045 Aurora Boulevard Quezon City Attention: Mr. Rogelio G. Chan Vice President Gentlemen : This refers to your letter dated February 13, 2004 stating that Geraldine A. Guerrero (Landowner) is the owner of a parcel of land located in Quisao, Pililla, Rizal containing an area of 80,126 square meters and covered by TCT No. (449858) M-1035 issued by the Registry of Deeds for Binangonan, Rizal; that on the other hand, Filipinas Dravo Corporation (Developer) is a domestic corporation duly organized and existing under the laws of the Philippines with postal address at PNNCC Building, EDSA corner Reliance Street, Mandaluyong City; that the Developer has the technical expertise in the development and management of a housing subdivision and/or commercial and/or industrial project and has the financial and material resources necessary for the same; that the Owner wishes to convert the property and to develop and/or dispose of the same as a residential, commercial or industrial estate; that on February 14, 1996, a Joint Venture Agreement (JVA) was entered into by the Landowner and the Developer to convert and develop and/or dispose of the property as a residential and/or commercial and/or industrial estate under the following terms and conditions: 1. The parties shall share between themselves the net profit of the project on this proportion: 70% for the Developer and 30% for the Owner. Net profit of the project shall be understood to be the net proceeds of the sale of marketable lots and other income derived from the project arrived at after first deducting all expenses and costs incurred in the project. 2. The Owner undertakes to cause the cancellation of any mortgage or encumbrance on the Property and the transfer of the title to the Property in her name as soon as possible not later than March 30, 1996; 3. The distribution of the net profit to the parties shall not be made until after payment of all costs and expenses of the project have been paid out of the proceeds of the project. Based on the foregoing representations, you now request confirmation of your opinion that the joint venture formed by the Owner and the Developer pursuant to their JVA is not subject to corporate income tax. In reply thereto, please be informed that 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 participation ), associations and joints or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects of engaging in petroleum, coal, geothermal and other energy operations pursuant to all operating or consortium agreement under a service contract with the Government. It is to be emphasized, however, that P.D. 929 excluded joint venture formed for the purpose of undertaking construction projects from the definition of the term "Corporation" because (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. 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 the above-named Owner and the Developer, for the development and subdivision of the aforesaid property is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997. Moreover, the transfer of the property by the Owner to the Developer pursuant to their JVA is not subject to the capital gains tax and to the documentary stamp tax under Sections 24(D)(1) and 196 of the Tax Code of 1997. However, the certification is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the said Code. However, the co-venturers are separately subject to the regular individual and corporate income taxes on their respective taxable income during each taxable year derived by them from the aforesaid construction project. Moreover, the JVA entered into by and between the Owner and Developer is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the Tax Code of 1997. However, the sale of the said real property shall be subject to the documentary stamp tax under Section 196 of the said Code. Moreover, the allocation and distribution of their respective shares in the project consisting of developed lots into residential, commercial or industrial estate in consideration of their respective contributions, as stipulated in the JVA is not a taxable event and is not subject to income tax, withholding tax, value-added tax and documentary stamp tax because the allocation is a mere return of capital that each has contributed. (BIR Ruling Nos. 10-96 dated January 23, 1996 DA065-97 dated February 10, 1997; DA286-98 dated June 29, 1998) Furthermore, since the partition to be executed by the parties allocating and distributing between them their respective shares in the project in exchange for their respective contributions is without monetary consideration but merely acknowledges and confirms the title and ownership of the above-named Owner and the Developer, the same is not subject to the value-added tax, income/creditable withholding tax nor to the documentary stamp tax respectively imposed under Sections 106, 24(c), 27(A) as implemented by Revenue Regulations No. 2-98, as amended and 196 all of the Tax Code of 1997. However, the sale of the respective share of the Owner and/or the Developer of the aforesaid property shall be subject to the creditable withholding tax, VAT and documentary stamp tax pursuant to Revenue Regulations No. 2-98, as amended, Sections 106(A) and 196 of the Tax Code of 1997. EcTDCI Finally, this will authorize the Revenue District Officer (RDO) of the revenue district where the property is located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the transfer of the titles to the lots to be received by the above-named Owner and Developer based on their respective allocations pursuant to the partition without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax and value-added tax. 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, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service