BIR Ruling [DA-131-99]

March 3, 1999 BIR RULING [DA-131-99] Megaworld Properties and Holdings, Inc. 28/F The World Centre 330 Sen. Gil Puyat Avenue Makati City Attention: Atty . Garry V . de Guzman Corporate Lawyer Gentlemen : This refers to your letter dated November 27, 1997 stating that Megaworld Properties and Holdings, Inc. (MEGAWORLD) and Project and Lands, Inc. (PLI) executed a Joint Venture Agreement on October 28, 1993 to develop a condominium project to be named "One Lafayette Square" located at Alfaro corner Sedeno corner San Agustin Sts., Salcedo Village, Makati City; that pursuant to the Joint Venture Agreement, MEGAWORLD and PLI agreed, among others, as follows: a) PLI shall contribute a land with an area of 1,249 sq. m. (Property) covered by Transfer Certificate of Title No. 121303 and MEGAWORLD shall be responsible for the financing, planning, development, construction and marketing of the condominium project; b) PLI shall be entitled to an Eighteen Percent (18%) share based on the total gross proceeds received from the project; MEGAWORLD shall be responsible for all cost of construction, administration, marketing, advertising and all expenses necessary for the completion and turnover of the project to the buyers, and as such shall have full power and authority to dispose as its own the remaining Eighty Two Percent (82 %) of the gross proceeds of the project. The 18% participation of PLI may either be in the form of cash or units or both at its option, but PLI opted that its share be in the form of condominium units; and You now request for a ruling to confirm your opinions that: 1. The joint venture between MEGAWORLD and PLI for the construction of the said condominium project will not create a taxable joint venture within the meaning of Section 22(B), in relation to Section 27 (A) of the Tax Code of 1997. 2. The allocation of the units and the issuance of the corresponding Condominium Certificate of Title by the Registry of Deeds of Makati City to MEGAWORLD and PLI, representing their respective shares or participating interests in the project as stipulated in the JVA are not taxable events, therefore, not subject to income and/or expanded withholding tax, because it is only upon sale or disposition of the units allocated to the MEGAWORLD and PLI to third parties that the gain realized by the parties in the said transaction will be subject to the regular 35% income tax under Section 27 (A) of the Tax Code of 1997 and to the expanded withholding tax under Revenue Regulations No. 6-85, as amended. 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. It is to be emphasized, however, that 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 Agreement entered into by and between MEGAWORLD and PLI is not subject to the regular income tax under Section 27(A) of the Tax Code of 1997. 2. The allocation of the units between MEGAWORLD and PLI 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 lots allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax under Section 27(A) 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. (BIR Ruling Nos. 274-92 dated September 30, 1992; 010-96 dated January 23, 1996; BIR Ruling Nos. DA065-97 dated February 10, 1997; DA286-98 dated June 29, 1998) The Partition Agreement whereby MEGAWORLD and PLI will allocate unto each other their share in the units 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. But instead, the partition is made merely to segregate the units 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 made to the residential subdivisions, 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. (BIR Ruling No. DA 061-99 dated February 5, 1999) prcd 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)