BIR Ruling [DA-133-06]

March 17, 2006 BIR RULING [DA-133-06] 22 (B); DA-192-2001 Sta. Lucia Realty and Development, Inc . G/F The Sentinel Condominium Gen. Manuel Cuenco Avenue Cebu City Attention: Mr. Gerardo D. Quintos Finance Officer Gentlemen : This refers to your letter dated February 08, 2006 requesting for a ruling that the assignment of lots by Julieta E. Orbeta, Paz A. Encomienda, Maximo A. Encomienda and Carmen A. Encomienda to Sta. Lucia Realty and Development, Inc. (Sta. Lucia for brevity) pursuant to their Joint Venture Agreement is not subject to capital gains tax or documentary stamp tax. Among the terms and conditions of the Joint Venture Agreement are as follows: a] That Julieta E. Orbeta, Paz A. Encomienda, Maximo A. Encomienda and Carmen A. Encomienda would contribute to the joint venture their real properties covered by Transfer Certificates of Title (TCT) Nos. T-13430, T-13431, T-13434, T-13435, T-13436, T-13437, T-13438, T-13439, T-13440, T-13441, T-13442 and T-13443 all situated at Talisay City, Province of Cebu; b] That Sta. Lucia would develop the aforesaid properties into a residential subdivision and all cost and expenses for the development would be at its sole account; DISaEA c] That the resultant saleable lots would be shared by each party on a 60%-40% basis in favor of the Developer; d] That each party has the free control and disposition in the sale of their shares to the joint venture. In order for the parties to completely exercise their respective rights to sell or dispose of the lots as each share pursuant to the Joint Venture Agreement, it is necessary that titles to lots corresponding to the share of Sta. Lucia be transferred in its name. Parties agreed to execute the Sharing Agreement whereby the share of the Developer of the lots subject to the Joint Venture Agreement would be assigned and titles thereto transferred and registered in its name. Obviously neither of the parties derives any profit or gain from this transfer as it is only made to segregate or apportion between themselves their shares of the developed lots pursuant to their Joint Venture Agreement. 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. HDCTAc P.D. No. 929 amended the definition of the taxable corporation so 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 between Julieta E. Orbeta, Paz A. Encomienda, Maximo A. Encomienda and Carmen A. Encomienda and Sta. Lucia is not subject to income tax under Section 27 of the Tax Code of 1997. The assignment by Julieta E. Orbeta, Paz A. Encomienda, Maximo A. Encomienda and Carmen A. Encomienda to Sta. Lucia of its corresponding 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 Sharing Agreement whereby Julieta E. Orbeta, Paz A. Encomienda, Maximo A. Encomienda and Carmen A. Encomienda and Sta. Lucia will allocate unto each other their shares 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 Sharing 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) aDIHCT 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 imports goods shall be subject to VAT imposed in Sections 106 to 108 of the same Tax Code. Hence, by contributing their parcels of land, Julieta E. Orbeta, Paz A. Encomienda, Maximo A. Encomienda and Carmen A. Encomienda neither sell, barter, exchange goods or properties nor render 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) 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 or capital gains tax under Section 24(D)(1) or Section 27(D)(5), as the case may be. 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 property, 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 ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service