BIR Ruling [DA-141-02]

August 29, 2002 BIR RULING [DA-141-02] 22 (B), 27 (A), 196, 57 (B) DA-062-2002 Sta. Lucia Realty & Development, Inc. Ground Flr., State Financing Bldg. Ortigas Avenue, Mandaluyong City Attention: Atty. Miriam G. Daway Legal Counsel Gentlemen : This refers to your letter dated July 25, 2002 quoted as follows: "1. On March 19, 1999, Sta. Lucia Realty & Dev., Inc. (herein referred as to the Developer) entered into a Joint Venture Agreement with Restituto Buenviaje, Juan C. Buenviaje, Juana Buenviaje-Santos, Teodora Buenviaje-Calubaquib, Corazon Buenviaje-Vizmonte, Consorcia Buenviaje-Castano, Felix C. Buenviaje, Josefina Buenviaje-Cleofas, and Augusto C. Buenviaje, (herein referred to as Owners) for the development of their properties located at Sto. Nio, Marikina City, with an aggregate area of 70,368 sq.m. into a residential/commercial subdivision project. For its developmental efforts, Sta. Lucia Realty & Dev., Inc. shall receive 37% of the resultant saleable area, while the owners shall retain 63%. The lots are covered by several titles as the same have been previously subdivided, and one of the obligations of the developer, as to have these lots consolidated, re-planned and subdivided . . .; "2. The parties agreed under par. 9 of the said agreement, that upon approval of the subdivision plan, the Owners shall assign in favor of the DEVELOPER (Sta. Lucia Realty & Dev., Inc.) the latter's 37% share on the resultant subdivided lots so that the share of the developer, could already be registered in its name. "3. Now, the subdivision plan has been approved by the Lands Management Bureau, under Pcs-04-009393 and the parties are to effect the provisions of their agreement, wherein Sta. Lucia shall receive its 37% share of the subdivision lots. "We would like to request for an opinion or ruling on the tax consequences of the following transactions: "1. What would be the taxes involved when the parties partition the resultant subdivided lots in accordance with their sharing under the joint venture agreement or when Restituto Buenviaje et al., (the owners) assigns unto Sta. Lucia Realty & Dev., Inc., (the developer) its corresponding 37% share on the resultant subdivision lots by virtue of the latter's compliance of its obligation under the joint venture agreement, being the developer of the project? "2. What would be the taxes involved when the parties eventually sell their share of subdivision lots to the buying public? 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. P.D. No. 29 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 as additional income tax lien. HICEca 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 Sta. Lucia Realty and the Owners is not subject to income tax under Section 27 of the Tax Code of 1997. The assignment by the Owners to Sta. Lucia Realty 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 Partition Agreement whereby the Owners and Sta. Lucia Realty 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 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 Partition 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 ) 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 the parcel of land, the Owners, neither sells, barters, exchanges goods, property nor renders 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. 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 properties, 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 disclosed that the acts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service