BIR Ruling [DA-120-00]

February 23, 2000 BIR RULING [DA-120-00] M . S . C . and Co . , Inc . San Roque, San Rafael Bulacan Attention: Engr . Manuel S . Cruz, Jr . President/General Manager Gentlemen : This refers to your letter dated January 7, 2000 requesting for a ruling on the exemption from capital gains tax relative to your joint venture agreement executed with Inocencio Ariel G. Briones, Milagros G. Briones, Andres Alain Briones and Margarita Portia Arlene G. Briones (Owners). Documents submitted disclosed that the above-named persons are the absolute and registered owners of a parcel of land located at Tanauan, Bustos, Bulacan covered by Transfer Certificate of Title No. T-28582 and an untitled lot adjoining said property; that the aforementioned properties have an aggregate area of 31,153 sq.m.; that M.S.C. and Co., Inc. (MSC) is a domestic corporation engaged in real estate development and presently undertaking the subdivision and development works of the aforestated property; and that the Owners and MSC entered into a Joint Venture Agreement dated July 18, 1998 in which they agreed on the following: "xxx xxx xxx "SCOPE OF WORK (The Project) "1. THE DEVELOPER shall undertake the construction and development of the project in accordance herein and made an integral part hereof as Annex "A"; "2. The development works shall include the furnishing by the DEVELOPER of labor, materials and equipments necessary for the completion thereof as well as the securing of the necessary licenses and permits from government agencies and instrumentalities as may be required by the said project; "3. THE OWNERS, for their part, shall guaranty the unimpeded access of THE DEVELOPER, to and from the said properties and shall cooperate with the latter in any manner practicable for the completion of the project; "xxx xxx xxx "SHARING (Obligation of the Parties) "5. THE DEVELOPER and THE OWNERS shall be entitled to SIXTY PERCENT (60%) and FORTY PERCENT (40%) respectively of the NET PROCESS. The net proceeds shall be computed as follows: Purchase Price less Marketing Expense of seven (7%) percent, less cash discount, if any." "6. THE DEVELOPER and THE OWNERS, in case of purchases by installments, shall likewise share in the interest to be added which is hereby fixed at twenty-four (24%) percent per annum on the balance of the purchase price, in the same manner referred to in the immediately preceding paragraph; "7. THE OWNERS shall contribute in the expenses for collection amounting to one-third (1/3) of its interest share referred to in the foregoing paragraph; "8. In the computation of the respective shares of the parties, the marketing expense of seven percent (7%), and cash discount, if any, shall first be deducted from the initial or down payments for installment purchases prior to such computation of shares; "9. Considering that the subject property is presently mortgaged in a financing institution, the redemption of the said property shall be given priority prior to the distribution of shares. In this regard, the net proceeds from sales of lots shall first be applied to the obligation until the latter if fully-paid; "10. After the settlement of the aforementioned obligation, THE OWNERS shall be reimburse THE DEVELOPER of the latter's sixty percent (60%) share which was first applied in payment thereof; "11. After THE OWNERS have reimbursed THE DEVELOPER of its shares mentioned in the foregoing, the former (THE OWNERS) shall not receive its share from the net proceeds and interest until after the lapse of three (3) months from full reimbursement of THE DEVELOPER's share; "12. On the fourth month therefrom, THE OWNERS shall now be entitled to its lawful share of forty percent(40%) plus one-third (1/3) of the accumulated shares in the net proceeds and interest for the past three months until such accumulated shares had been fully paid to THE OWNERS or for three successive months; "xxx xxx xxx 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. 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 entered into by and between the Owners and MSC is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. 2. The allocation of saleable area of the project between the Owners and MSC 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 areas allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax rates under Section 24 and 27(A) both 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. However, said 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, fair market value or zonal value of the properties whichever is higher. 3. The Partition Agreement whereby the Owners and MSC 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, income tax and any withholding tax because the allocation is made without monetary consideration and is not in connection with a sale. The partition is made merely to segregate the saleable area 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, 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. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group