BIR Ruling [DA-150-03]

May 7, 2003 BIR RULING [DA-150-03] 22 (B) BIR Ruling No. DA-11-03 Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty. J.A. Osana Tax Division Gentlemen : This refers to your letter dated April 1, 2003 requesting in behalf of your, clients, Matsuda Property Development Corporation and Philippine Savings Bank ("Parties"), for confirmation of your opinion on the tax consequences of the Memorandum of Agreement which Matsuda has entered into with PSBank. Documents show that Matsuda Property Development Corporation ("Matsuda") is a legal entity organized and operating under the laws of the Philippines with principal office located at PSBank Centre, No. 777 Paseo de Roxas corner Sedeo St., Salcedo Village, Makati City; that Philippine Savings Bank ("PSBank") is a banking corporation organized and existing under and by virtue of the laws of the Philippines with principal office also located at PSBank Centre, No. 777 Paseo de Roxas corner Sedeo St., Salcedo Village, Makati City; that Matsuda and PSBank are lessees of a multi-storey office condominium building ("Property") owned by FMIC (formerly Solidbank) located at No. 777 Paseo de Roxas corner Sedeo St., Salcedo Village, Makati City, with a total area of 2,977 square meters more or less, covered by and more particularly described in Transfer Certificate of Title (TCT) No. 217621 of the Registry of Deeds of Makati City; that the parties wish to acquire the whole floors or portions of floors of the project for its future head offices, as well as the parking slots and to establish a condominium corporation to hold title to and manage the land and the common areas of the project; that in order to achieve their objectives, the Parties agreed to contribute cash for the joint acquisition of the Property and, subsequent to such acquisition, to divide and allocate the Property between themselves in proportion to their respective contributions; that their agreement was embodied in a MOA; that the MOA provides for the following terms and conditions: 1. Matsuda shall contribute cash of Three Hundred Eighty Million Pesos (Php380,000,000.00) while PSBank shall contribute cash of Eight Hundred Seventy Million Pesos (Php870,000,000.00), for a total of One Billion Two Hundred Fifty Million Pesos (Php1,250,000,000.00), in order to acquire the Property. 2. Matsuda will be the project supervisor for the construction, renovation, upgrading, administration and maintenance of the Property. 3. Upon acquisition of the Property, specific whole floors or portions thereof, including parking slots shall be specifically, designated and allocated in separate ownership between the parties, in proportion to their respective contributions. 4. The parties will then form a condominium corporation that will hold title to, manage, and maintain the land and the common areas and to do such things as may be necessary, incidental and convenient to preserve the rights of the owners/tenants pursuant to the provisions of Republic Act No. 4726, otherwise known as the Condominium Act. In view of the foregoing, you now request confirmation of your opinions that 1) the contribution of cash by the parties, pursuant to the MOA for the acquisition of the Property and the subsequent allocation, or division of specific whole floors or portions of floors including parking slots therein, in separate ownership, between the parties, and in proportion to their respective contribution, does not create a taxable joint venture or partnership; and 2) the allocation of specific floors or portions thereof, including parking lots will not give rise to income tax, expanded withholding tax, value-added tax or to documentary stamp tax imposed under the Tax Code. In reply, please be informed as follows: 1) Pursuant to Section 22(B) of the Tax Code of 1997, the term "corporation" shall include 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 of operations pursuant to an operating or consortium agreement under a service contract with the Government. caHIAS Such being the case, the joint venture that will be formed as a result of the MOA by and between Matsuda and PSBank for the construction, renovation, and upgrading of the Property is not subject to the corporate income tax under Sec. 27(A) of the Tax Code of 1997. However, the co-venturers are separately subject to the regular corporate income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. Considering the foregoing, the joint venture of Matsuda and PSBank for the construction and development of the Project will not create a taxable joint venture within the meaning of Sec. 22(B), in relation to Sec. 27(A) of the Tax Code of 1997. 2) The allocation of their specific floors or portions thereof and parking slots in the project in consideration of their contribution in the project, as stipulated in the MOA, and the issuance of the corresponding condominium Certificate of Title by the Registry of Deeds of Makati City to Matsuda and PSBank representing their respective shares or participating interests in the project as stipulated in the MOA is not a taxable event. The same is therefore, not subject to income, withholding, value-added and documentary stamp taxes. Nonetheless, the acknowledgment to the Deed is subject to documentary stamp tax under Section 188 of the Tax Code of 1997. 3) It is only upon sale or disposition of the units allocated to Matsuda and PSBank to third parties that the gain realized by the parties in the said transaction will be subject to the regular 35% (now 32%) income tax under Sec. 27(A) of the Tax Code of 1997, the creditable withholding tax under Revenue Regulations No. 2-98, as amended and the value-added tax under Section 106 of the Tax Code of 1997. The transfer of the said properties to third parties shall likewise be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 based on the consideration or the fair market value of the property being transferred, whichever is higher. 4) Section 185 of the Revised Documentary Stamp Tax (DST) 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 Deed of Conveyance and Deed of Partition are without consideration and are not in connection with a sale made to Matsuda and PSBank and the condominium corporation, respectively, no income was generated and a fortiori, no income, creditable withholding, value-added and documentary taxes are payable and collectible. However, the acknowledgment to said Deed of Conveyance and Deed of Partition are subject to DST of P15.00 pursuant to Section 188 of the Tax Code of 1997. In view thereof, the Deed of Conveyance to be executed by Matsuda and PSBank to convey the land to a condominium corporation and pursuant to the Condominium Act and the Deed of Partition whereby Matsuda and PSBank allocate unto each other their respective shares in the floors or portions thereof and parking slots in the project, in consideration of their respective contributions in the project, considering that both are without monetary consideration, will not be subject to income, withholding, value-added and documentary stamp taxes under Section 196 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 shall be considered null and void ( BIR Ruling No. DA-011-03 dated January 16, 2003 ). Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service