BIR Ruling [DA-158-06]

March 27, 2006 BIR RULING [DA-158-06] 27 (A); DA-097-2001 Equitable PCI Bank Equitable PCI Bank Towers Makati Avenue cor. H.V. dela Costa Street Makati City Attention: Mr. Ricardo V. Martin Executive Vice President & Chief Financial Controller Gentlemen : This refers to your letter dated October 17, 2005 requesting for a confirmation of your opinion that (1) the joint development of an exclusive residential subdivision of Equitable PCI Bank (EPCIB) and Crown Asia Properties, Inc. (CAPI) will not create a taxable joint venture within the meaning of Section 22(B) in relation to Section 27(A) of the National Internal Revenue Code of 1997 and (2) the allocation of their respective interests in the project and the execution of the Deed of Partition to implement such allocation, are not taxable events and are not subject to income/expanded withholding tax, value-added tax and documentary stamp tax under Section 196 of the Tax Code. It is represented that EPCIB is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines; that CAPI is likewise a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with principal place of business at G/F Las Pias Business Centre, Alabang-Zapote Road, Talon, Las Pias, Metro Manila; that EPCIB is the registered owner of a parcel of land situated in Barangay Domingo, Municipality of Sta. Rosa, Province of Laguna, with an aggregate area of 116,862 square meters, more or less, particularly described in Transfer Certificates of Title Nos. 595417-595421; that a portion of the property to the extent of 10,350 square meters, more or less, was expropriated as public road and is therefore excluded from the Agreement; that a portion to the extent of 4,789 square meters, more or less, was affected by the National Power Corporation (NPC) power lines; that after considering the said portions of the property, EPCIB shall have the remaining 101,723 square meters more or less of the property consolidated and developed into a mixed-use residential subdivision; that CAPI presented itself to have the license, authority, capacity and ability to develop prime subdivision lots, and EPCIB, on the basis of the said representation agreed to enter into an Agreement with CAPI for the development of the property into an exclusive residential subdivision; that the parties agreed to form an unincorporated joint venture and sign an Agreement to pool their resources and jointly develop the subject properties; and that the parties agreed on the following: a) The Owner (EPCIB) shall turn over possession of the property to the Developer; b) The Developer (CAPI) shall finance the entire cost of developing the Project Land Area based on the Site Development Plan and shall be responsible for causing, overseeing and coordinating the performance of all the necessary work for the development of the Project Land Area and marketing of the saleable units; c) In return for their respective contributions to the project, the Owner and the Developer agree to allocate and distribute the saleable lots as defined and identified in the Site Development Plan as approved by the local government unit (LGU) and the Housing and Land Use Regulatory Board (HLURB) that basically will result to sharing ratio of sixty percent (60%) in favor of the Owner and forty percent (40%) in favor of the Developer; HcSaAD d) As soon as the saleable lots to be assigned respectively to the Developer and the Owner are so determined, and the development permit is obtained, the Developer and the Owner shall execute a Deed of Lot Allocation in order that upon subdivision of the mother titles into individual lot titles, the lots respectively pertaining to the Developer and Owner shall already be registered in their respective names. In reply, please be informed that 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 participation ), 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. Such being the case, the Joint Venture entered into by and between EPCIB and CAPI is not subject to corporate income tax under Section 27 of the Tax Code of 1997. Likewise, gross payments received by the joint venture are not subject to the 2% expanded withholding tax prescribed under Section 57(B) of the Tax Code of 1997 as implemented by Revenue Regulations No. 6-85 and amended by Revenue Regulations No. 2-98. The allocation of saleable area of the project between EPCIB and CAPI 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 from such sale will be subject to the regular income tax rates under Sections 24, 27(A) or 27(E) of the Tax Code of 1997, as the case may be, and/or to the creditable withholding tax under Revenue Regulations No. 2-98. Furthermore, 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 property whichever is higher. Moreover, the said sale shall also be subject to value-added tax. The Partition Agreement whereby EPCIB and CAPI 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 Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. DA-097-2001 dated May 28, 2001) CTDAaE 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, this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service