BIR Ruling [DA-155-01]

September 05, 2001 BIR RULING [DA-155-01] 22 (B), 27 (A), 196, 57 (B) DA-096-2000 Greenfield Development Corporation 2/F Greenfield Building, 750 Shaw Boulevard Mandaluyong City Attention: Atty. Fredderick A. Vida Corporate Counsel Gentlemen : This refers to your letter dated December 1, 2000 quoted as follows: "This has reference to the Development and Marketing Agreement ("Agreement") entered into by and among Laguna Properties Holdings, Inc. ("LPHI"), Greenfield Development Corporation ("GDC"), Balibago Land Corporation ("BLC"), Maunong Development Corporation ("MDC") and Batangas Assets Corporation ("BAC") on September 15, 2000. Pursuant to said agreement, the parties therein agreed to jointly develop certain parcels of land located in Barangays San Antonio and San Rafael in Sto. Tomas, Batangas with an area of approximately 580,819 square meters into an integrated residential subdivision project. " Background "For the development of said parcels of land, LPHI, GDC, BLC, MDC AND BAC agreed to form an unincorporated joint venture. The parties shall pool their resources and contribute as follows: "As Landowners "Company Contribution "Laguna Properties Holdings, Inc. 45% undivided interest in parcels of land constituting an area of approximately 580,819 square meters "Balibago Land Corporation/ 45% undivided interest in parcels of Maunong Development Corporation land constituting and area of approximately 580,819 square meters "Batangas Assets Corporation 10% undivided interest in parcels of land constituting an area of approximately 580,819 square meters "As Developers "Company Contribution "Laguna Properties Holdings, Inc. 45% of any and all capital requirement for the development of the parcels of land "Greenfield Development Corporation 45% of any and all capital requirements for the development of the parcels of land "Batangas Assets Corporation 10% of any and all capital requirements for the development of the parcels of land "From the foregoing contributions, the Developers, LPHI, GDC and BAC, shall initiate construction and development of an integrated residential subdivision project aimed at catering to low-to-middle income families. The joint venture project shall be developed and be made available to the public in phases. A mixture of developed lots only and developed lots and units shall be constructed and completed for the various phases of the joint venture project. "After development of each phase has been completed, the developed salable lots and units shall be divided and allocated by the Parties as follows: "45% of the Saleable Lots and Units - for LPHI "45% of the Saleable Lots and Units - for GDC/BLC/MDC "10% of the Saleable Lots and Units - for BAC "Thereafter, Saleable Lots and Units allocated to the joint venture partners shall be offered for sale to the public with the parties agreeing to utilized LPHI as the exclusive marketing agent. "xxx xxx xxx In view of the foregoing, you request for a confirmation of your opinion and a ruling that: 1. The joint venture whereby LPHI, GDC, BLC, MDC and BAC will contribute their respective parcels and cash for the development of the parcels into a residential subdivision and other development works, does not give rise to a taxable joint venture, hence, is not subject to corporate income tax pursuant to Section 22(B) in relation to Section 27(A) of the Tax Code. 2. The contribution by the joint venture partners of the parcels of land to the joint venture represents their respective capital contributions to the joint venture project, hence, such contribution is not a taxable event that will give rise to income/capital gains tax and value-added tax. 3. The allocation and distribution of the co-venturer's respective shares in the construction project consisting of developed lots or developed lots and units in consideration of their respective contributions to the joint venture is not a taxable event, hence, is not subject to income tax, creditable withholding tax, and value-added tax because the allocation is a mere return of capital that each of the joint venture partners has contributed to the project. Consequently, the Deed of Partition and Conveyance or any such deed or document that the joint venture partners will execute to evidence such allocation and distribution is not subject to value added tax, income/creditable withholding tax, and the documentary stamp tax under Section 196 of 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 includes partnership, no matter how created or organized, joint stock companies, joint accounts (cuetas 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 the Landowners and the Developers is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. 2. The co-venturers did not convey or transfer their ownership or interest over their parcels of land when they contributed the aforesaid landholdings to the joint venture but merely pooled their resources to a common fund. These pooled resources are co-owned by the joint venture partners. The said contribution constituted their respective capital contributions 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 the Landowners and the Developers in consideration of their respective contributions, as stipulated in the 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 the Landowners and the Developer 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. acHETI 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.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group