BIR Ruling [DA-166-01]

September 19, 2001 BIR RULING [DA-166-01] Herrera Teehankee Faylona & Cabrera 5F SGV II Building 6758 Ayala Avenue Makati City Attention: Atty. Arsenio C. Cabrera, Jr. Gentlemen : This refers to your letter dated April 25, 2000 stating that your client, Architect William V. Coscolluela (Arch. Coscolluela), is the absolute and registered owner of a parcel of land located at Perea Street, Legaspi Village, Makati City containing an area of 856 square meters covered by TCT No. 214998 issued by the Registry of Deeds for Makati; that on the other hand, W.V.C. Development Corporation (WVCDC) is a domestic corporation duly organized and existing under the laws of the Philippines with principal office address at 7646 Guijo Street, San Antonio Village, Makati City; that it is organized primarily to acquire by purchase, lease or otherwise, land and interest in land, real estate and other kinds and forms of real property, and to own, hold, develop, lease, utilize and exploit the same, to erect or cause to be erected on any land so acquired, buildings or other structure with their appurtenances; to carry on the business of buying and selling real estate or subdivisions, residential or otherwise, including the construction of housing projects; that on December 15, 1999, Arch. Coscolluela and WVCDC entered into a Joint Venture Agreement (JVA) for the construction of a condominium building known as the Palisades, a twenty-seven (27) storey condominium consisting of seventy (70) residential units, two (2) ground floor commercial units, two (2) office floors and seven (7) parking levels (the Project); that Arch. Coscolluela agreed to contribute the above-mentioned parcel of land, while WVCDC, on the other hand, agreed to shoulder the expenses for the construction and development of the Project; and that pursuant to the JVA, particularly Section 5.1, the parties agreed to allocate between them the salable areas or units thereof as well as the parking spaces in the following manner; forty percent (40%) of the units and parking spaces shall go to Arch. Coscolluela while the balance of sixty percent (60%) shall be allocated to WVCDC. In connection therewith, you now request confirmation of your opinion that: "1. The joint venture agreement between Arch. Coscolluela and WVCDC does not give rise to a separate taxable joint venture; "2. The contributions of Arch. Coscolluela and WVCDC to the joint venture for the construction and development of the condominium known as the Palisades are not subject to tax; and "3. The transfer of specifically designated condominium units and parking slots and the issuance of the corresponding Condominium Certificates of Title to Arch. Coscolluela and WVCDC are not subject to income tax, capital gains tax and documentary stamp tax." In reply thereto, please be informed that your opinion is hereby confirmed as follows 1. Section 22(B) of the Tax Code of 1997 provides that 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. It is to be emphasized, however, that P.D. 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) It may be necessary for local contractors to enter into joint ventures to pool their limited resources in undertaking big construction projects in order to be able to compete with big foreign contractors; (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 legislative 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 Agreement entered into by Arch. Coscolluela and WVCDC for the construction and development of the condominium known as Palisades is not subject to the corporate income tax under Section 27 (A) of the Tax Code of 1997. However, the co-venturers are separately subject to the regular income tax on their taxable income during each taxable year respectively derived by them from the sale of their respective shares in the aforesaid construction project. Moreover, the sale of the said real property shall be subject to the documentary stamp tax under Section 196 of the Tax Code of 1997. Likewise, the Joint Venture Agreement entered into by and between Arch. Coscolluela and WVCDC is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the said Code. 2. The contributions of Arch. Coscolluela and WVCDC to the joint venture for the construction and development of the condominium is not a taxable event that will give rise to the payment of capital gains tax and credible withholding tax, since contribution of land to the joint venture project is but a capital contribution to the said joint venture project, and therefore, no taxable event has taken place. The same is true in the case of value-added tax (VAT) since under Section 105 of the Tax Code of 1997, any person who, in the course of trade or business, sells, barters, exchange, leases goods or properties, renders services and any person who imports goods shall be subject to VAT imposed in Sections 106 to 107 of the said Code. Accordingly, by contributing land to the joint venture project, the parties thereto neither sells, barters, exchanges goods or property nor renders services nor imports goods to be subject to VAT. Consequently, the capital contribution of land to the joint venture project by the parties thereto is not subject to capital gains tax, creditable withholding tax and VAT. (BIR Ruling No. DA165-99 dated March 18, 1999) 3. The allocation and distribution of their respective shares in the project consisting of condominium units, parking slots in consideration of their respective contributions, as stipulated in the Joint Ventures Agreement is not a taxable event and is not subject to income tax, withholding tax, value-added tax and documentary stamp tax because the allocation is a mere return of capital that each has contributed. (BIR Ruling Nos. 10-96 dated January 23, 1996; DA065-97 dated February 10, 1997; DA286-98 dated June 29, 1998). The eventual transfer of title in their respective name is but a mere formality, hence, not a taxable event. The taxable event will arise when the co-venturers start selling their respective shares to third parties. Finally, this will authorize the Revenue District Officer (RDO) of the revenue district where the properties are located to issue the corresponding Tax Clearance Certificate (TCL) involving the transfer of the titles of the above-mentioned lots in the name of Arch. Coscolluela and WVCDC on their respective allocations pursuant to the said Joint Venture Agreement, without need of the presentation of proof of payment of the creditable withholding tax, value-added tax and the corresponding documentary stamp tax. In order to monitor whether the pro-rata allocation of 40%-60% between the parties is achieved at the completion of the entire project, the party concerned, receiving its allocation in a particular phase, shall submit to the RDO a certification by an authorized officer of the joint venture the particular lots received as its allocation for such phase and the corresponding aggregate Reference Values of the said lots. However, in the subsequent sale by Arch. Coscolluela and WVCDC of their respective shares in the saleable lots to third parties, the income that may be realized by them from such sale for each taxable year will be subject to the regular income tax respectively imposed under Sections 24(A) and 27(A), both of the Tax Code of 1997, to the creditable withholding tax under Revenue Regulations No. 2-98, as amended, to the value-added tax and corresponding documentary stamp tax respectively imposed under Sections 106 and 196, both of the Tax Code of 1997. (BIR Ruling Nos. 274-92 dated September 30, 1992; 010-96 dated January 23, 1996; DA065-97 dated February 10, 1997; DA286-98 dated June 29, 1998) IcHTAa 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group