BIR Ruling [DA-132-99]

March 3, 1999 BIR RULING [DA-132-99] 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 Menvir Realty Corporation (MENVIR) executed a Memorandum of Agreement (MOA) on October 3, 1994 to develop a condominium project to be named "Two Lafayette Square" located at Tordesillas St., Salcedo Village, Makati City; that pursuant to the Memorandum of Agreement, MEGAWORLD and MENVIR agreed, among others, as follows: a) MENVIR shall contribute a land with an area of 1,069 sq. m. (Property) covered by Transfer Certificate of Title No. S-46238 and MEGAWORLD shall be responsible for the financing, planning, development, designing, execution, construction, monitoring and supervision of all facets of works on the building in accordance with the architectural design specification to be prepared by an architectural firm of MEGAWORLD's choice, all subject to MENVIR's approval; b) MENVIR's share in the project shall be one (1) Penthouse located on the Twenty-Eight (28th) floor, similar if not identical in design to MEGAWORLD's Penthouse, one (1) Unit of Executive Suite on the Twenty-Seventh (27th) floor, and the whole of the Twenty-Sixth (26th), Fourteenth (14th), Fifteenth (15th) and Sixteenth (16th) floors; c) MENVIR's share or participating interest represents Nineteen Percent (19%) of the net saleable area of the Typical residential Areas of the protect. Moreover, MENVIR shall also be entitled to One-Hundred Fifty (150) sq. m. net saleable area of office unit in the Business Center of the project, Forty-Two (42) parking slots to be distributed evenly or equitably on the podium parking levels of the project; d) The title to the Property shall remain with MENVIR until conveyance of the Property by MENVIR in favor of the Condominium Corporation upon completion of the construction and immediately before the start of the turnover of the units to the condominium buyers; and e) MENVIR shall have the right to directly market or sell/rent its units, subject to a uniform marketing, sales/rent and pricing policy with MEGAWORLD. However, MEGAWORLD agrees to act as MENVIR's sales/leasing agent of the latter's units if MENVIR elects to designate MEGAWORLD as such. You now request for a ruling to confirm your opinions that: 1. The joint venture between MEGAWORLD and MENVIR 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 MENVIR, representing their respective shares or participating interests in the project as stipulated in the MOA 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 MENVIR 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 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 MENVIR 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 MENVIR 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 MENVIR which 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) 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. LibLex Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)