BIR Ruling [DA-150-02]

September 9, 2002 BIR RULING [DA-150-02] Secs. 22 (B), 27 (A), 196, 67 (B) DA-096-2000 Quiason Makalintal Barot Torres & Ibarra 21st Floor Robinsons-Equitable Tower 4 ADB Ave. cor. Poveda Street Ortigas Center, Pasig City Attention: Atty. Ruelito Q. Soriano and Cherryl June M. Calaguio Gentlemen : This refers to your letter dated May 15, 2002 quoted as follows: "Florida Del Mar (the " Landowner ") is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with office address at 312 Shaw Boulevard, Mandaluyong City. DHITSc "Builders 2000, Inc. (The " Developer ") is also a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with its office address at 38 Rosario Drive, Cubao, Quezon City. "On March 16, 2001, the Landowner entered into a Joint Venture Agreement (the " JVA "), whereby the parties agreed to pool their respective resources to put up a condominium building on the property of the Landowner (the " Project "). In particular, Landowner's contribution to the Project is a parcel of land situated at 2126 A. Mabini St., Malate, Metro Manila, with an area of 1,184 sq. m., more or less (the " Property "), originally covered by Transfer Certificate of Title No. 248953 issued by the Registry of Deeds of Manila in the name of Litton's Finance & Investment Corp., and which is now covered by Transfer Certificate of Title No. 252662 issued by the Registry of Deeds of Manila in the name of the Landowner. . . . "Under the JVA, the Landowner agreed to transfer possession over the Property of the Developer for the purpose of developing such into a twenty eight-storey residential condominium building (the " Condominium Project "). The Developer on the other hand, undertook to provide all the necessary resources for the construction and completion of such condominium building. Upon the completion of the Condominium Project, ownership of certain condominium units will be apportioned to the Landowner as its share in such joint venture undertaking. . . . "Subsequently, the parties amended the Joint Venture Agreement in such a way that two (2) of the condominium units originally apportioned to the Landowner were exchanged for Nine (9) parking slots. . . . "Pursuant to Sec. 2 of Republic Act No. 4726, otherwise known as the Condominium Act, the Landowner and Developer shall cause the incorporation of a condominium corporation, a non-stock non-profit corporation which will be tasked to own and manage the common areas of the Condominium Project. Since the Condominium Property will form part of the common areas of the Condominium Project, the Landowner will transfer the title over the Property in favor of such condominium corporation. Such transfer will be effected without Landowner receiving any monetary consideration from the condominium corporation. "Given the facts, as stated above, we wish to secure a ruling confirming our opinion that: "1. The joint venture for the construction of the Condominium Project does not give rise to a separate taxable entity; "2. The assignment/transfer of the Units to the Landowner is exempt from all types of taxes considering that the original registration of the respective commercial/residential units and parking spaces in the Landowner's name do not yet involve any transfer to third persons or the public; "3. The transfer of title to the land from the Landowner to the condominium corporation will not be subject to tax;" xxx xxx xxx 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. 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 entered into by and between Florida del Mar, Inc. and Builders 2000, Inc. is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. 2. The Landowner did not convey or transfer its ownership or interest over the parcel of land when it contributed the aforesaid landholding to the joint venture but merely pooled said resources to a common fund. The pooled resources are co-owned by the joint venture partners. The said contribution constituted its capital contribution to the joint venture project, therefore, such contribution is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax. The transfer is also not subject to VAT, since the transfer is not in the course of business but a capital contribution. 3. The allocation of saleable area of the project between Florida del Mar, Inc. and Builders 2000, Inc. 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 areas allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax rate under Section 27(A) of the Tax Code of 1997, and to the creditable withholding tax under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001. Moreover, said 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. The Partition Agreement whereby Florida del Mar, Inc. and Builders 2000, Inc. 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, income tax and any withholding tax because the allocation is made without monetary consideration and is not in connection with a sale. The partition is made merely to segregate the saleable area between the parties, as the return of the capital which each contributed. However, the acknowledgment to said Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. Finally, the Deed of Conveyance that will be executed transferring to the condominium corporation the management of the common areas of the aforesaid project will not be subject to creditable withholding tax pursuant to Section 57(B) in relation to Section 27 of the Tax Code of 1997. Neither it is subject to the documentary stamp tax imposed under Section 196 of the same Code, because conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable. But the notarial acknowledgment to said deed of conveyance is subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code of 1997. 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service