Esguerra & Blanco Law Offices

March 7, 2008 BIR RULING [DA-149-08] 22 (B); DA-192-2001 Esguerra & Blanco Law Offices 4th Floor, S & L Building Dela Rosa corner Esteban Sts. Legaspi Village, Makati City Attention: Atty. Magilyn T. Loja Gentlemen : This refers to your letter dated February 26, 2008 requesting on behalf of your client, Ardent Property Development Corporation (Ardent for brevity) for confirmation of your opinion that: a) the joint venture between JRB Realty, Inc. (JRB) and Ardent for the development of a condominium project is not a taxable joint venture within the meaning of Sec. 22 (B) of the 1997 Tax Code; and b) the allocation of JRB's and Ardent's respective interests in the Project, their execution of the Deed of Partition to implement such allocation and the transfer of title in Ardent's name representing its share in the Project are not taxable events and are not subject to income tax, withholding tax, value-added tax (VAT) and documentary stamp tax under Sec. 196 of the 1997 Tax Code, as amended. It is represented that Ardent and JRB are corporations duly organized and existing under Philippine laws which are both engaged in the development of real estate. JRB is the registered owner of two (2) parcels of land, as well as the building and other improvements thereon currently known as the "Blanco Center" situated at 119 L.P. Leviste Street, Salcedo Village, Makati City and covered by Transfer Certificates of Title (TCT) Nos. S-83334 and 147671 issued by the Registry of Deeds for Metro Manila District IV and Registry of Deeds for Makati City, respectively (the "Property"). On September 24, 2007, the co-venturers entered into a Joint Venture Agreement (JVA) for the re-development of the Property whereby JRB has agreed to contribute the Property, and Ardent to contribute the funds to finance the re-development thereof, as well as the expertise in the development, marketing and sale of the condominium units in the Project. The Project consists of the planning, construction and re-development of the Property into a condominium serviced residences which shall be known as "The Picasso Serviced Residences." In consideration for their respective contributions to the Project, JRB and Ardent shall share in the distribution of the condominium units resulting from the re-development of the subject Property including the available parking slots based on a 51%-49% sharing ratio for JRB and Ardent, respectively, subject to the terms and conditions provided in the JVA. * 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 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; and (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. aDSIHc 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 JRB and Ardent is not subject to income tax under Section 27 of the Tax Code of 1997, as amended. The allocation of JRB's and Ardent's respective interests in the Project is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax, because the allocation is a mere return of capital contribution, and therefore not a taxable event. (BIR Ruling No. DA-192-2001 dated October 17, 2001). The deed of partition that will be executed by JRB and Ardent whereby they will allocate unto each other their shares, in accordance with their respective equity contributions as stipulated in the JVA is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, 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 acknowledgment to said deed is subject to the documentary stamp tax pursuant to Section 188 of the same Tax Code, as amended. (BIR Ruling No. DA-240-2001 dated November 16, 2001) EAHcCT 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 its parcels of land, JRB, neither sells, barters, exchanges goods, properties 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 or capital gains tax under 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 1997 Tax Code, as amended, 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. ScaEIT Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service