BIR Ruling [DA-159-06]

March 27, 2006 BIR RULING [DA-159-06] 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 a subdivision of Equitable PCI Bank (EPCIB) and Filinvest Land Inc. (FLI), 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 FLI, likewise a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, is a licensed developer and has authority, capacity and ability to develop prime subdivision lots; that EPCIB is the registered owner of a parcel of land situated in Barangay Muzon, Municipality of Angono, Province of Rizal, with an aggregate area of 570,725 square meters, particularly described in Transfer Certificate of Title No. 662577; 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 (FLI); b) The FLI agrees to undertake the subdivision and horizontal development of the property substantially in accordance with, and as an integral part of, the master development plan to be prepared by the Developer and approved by the Equitable PCI Bank (the Owner); c) For and in consideration of the development obligations, the developed lots shall be divided and allocated by the parties as follows: (1) The Developer shall receive ownership of the 43% of the saleable lots in the property; (2) The Owner shall retain ownership of the 57% of the saleable lots in the property; (d) As soon as the saleable lots to be assigned respectively to the Developer and the Owner are 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 the Owner shall already be registered in their respective names. TEHIaA 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 FLI 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 FLI 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 FLI will allocate unto each other their shares 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) 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. cETCID Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service