Macam Raro Ulep & Partners

March 17, 2008 BIR RULING [DA-167-08] 22(B); DA-192-2001; DA-240-2001 Macam Raro Ulep & Partners Unit 1008, 10/F Atlanta Center Annapolis St., Greenhills San Juan City Attention: Atty. Augusto M. Macam Gentlemen : This refers to your letter dated February 15, 2008 requesting on behalf of your clients, Kaizen Export Import and Business Development, Inc. (Property Owner) and Fuente Triangle Realty Development Corporation (Property Developer) for confirmation of opinion that their joint venture arrangement for the development of parcels of land into residential-commercial complex located in Ramos Street, Cebu City to be known as Ultima Residences will not create a taxable joint venture as contemplated within the meaning of Section 22 (B),in relation to Section 27 (A),both of the Tax Code of 1997 and the allocation of their respective interest in the project as contemplated in the Joint Venture Agreement (JVA) is not a taxable event and is not subject to income/creditable withholding tax (CWT),value-added tax (VAT) and documentary stamp tax (DST) under Sec. 196 of the same Tax Code. It is represented that the Property Owner is the absolute and registered owner of several parcels of land located in Ramos St.,Cebu City, the titles, technical description and approximate land areas are all described in Transfer Certificates of Title (TCT) Nos. 184411 and 184412. The Property Owner and the Property Developer executed a JVA for the joint development of the above-described parcels of land (the Project Area) into mixed used (residential and commercial) condominium building incorporating therein modern and highly efficient and functional facilities and state-of-the-art technology. The project includes the Master Plan of the intended development of the project prepared by the Property Developer, the design and construction of the building, the required open spaces, amenities and facilities in the project area including the marketing and sale of the finished residential and commercial units in the project. In particular, the essential terms and conditions of the agreement are as follows: ECcTaS 1. The Property Owner shall contribute their right, title and interest over the parcels of land constituting the contemplated project development of the properties. 2. The Property Developer shall provide all the necessary requirements to construct and develop the contemplated project and shall be responsible for financing, overseeing, coordinating and causing the performance and execution of the necessary works for the implementation of the project. 3. As consideration for and in return of the investment, the equivalent capital contribution/interest of the parties to the agreement shall be divided and distributed in accord with the following proportion: a. To the Property Owner, shall be assigned 30 important parking slots in the commercial and residential building located in the different floors of the building as per approved plans and specification constituting the irrevocable and absolute value which shall be evidenced by the execution of a document of acceptance of the parking lots assigned to it. b. To the Property Developer, it shall own the land and the building does constructed, likewise to be evidenced by the appropriate document of conveyance. 4. The actual distribution to the parties of the respective interest shall be effected through deeds of conveyance for which the parties will execute without monetary consideration. HAISEa 5. Pursuant to the above formulation, the parties shall maintain separate ownership of their respective rights and interests on the parking lots and the units. You now request confirmation of your opinion, particularly that: 1. The JVA whereby the Property Owner will contribute the Project Area (the Property) and the Property Developer will finance the entire project does not constitute or 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) both of the Tax Code of 1997. 2. The allocation and distribution of the assigned parking slots to the Property Owner and the identification of the units to be assigned to the Property Developer in consideration for the respective contribution to the joint venture is not a taxable event and is not subject to the regular corporate income tax nor to the CWT under Revenue Regulations (RR) No. 2-98, nor the VAT, DST under Sec. 196 of the 1997 Tax Code, for the reason that the allocation is a mere return of capital that each of the parties have contributed to the project. 3. The deeds of conveyance or assignment to be executed by the parties whereby they allocate and distribute among themselves the respective shares in the project in exchange for their respective contribution is without monetary consideration and hence, are not subject to VAT under Section 106 of the 1997 Tax Code, income/CWT under RR 2-98 and DST under Sec. 196 of the same Tax Code. 4. Consequently, the confirmation of this request will authorize the Revenue District Officer (RDO) concerned to issue the corresponding tax clearance certificate with regard to the issuance of the titles to the units and/or parking slots to be received by and delivered to each of the parties based on their respective allocations without need of presentation of payment of the CWT, VAT and DST. In reply, please be informed as follows: ITScHa 1. Pursuant to Section 22 (B) of the Tax Code of 1997, the term "corporation" 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 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 so 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; and (4) To assist them in achieving competitiveness with foreign contractors, the joint ventures formed by them should not be considered as additional income tax lien. Considering therefore, 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 hereby opines that the joint venture by and between the Property Owner and the Property Developer is not subject to income tax under Sec. 27 of the Tax Code of 1997, as amended. 2. The allocation between the Property Developer and the Property Owner of their corresponding shares of the units in the Project or assigned parking slots is not a taxable event that will give rise to the payment of regular income tax/CWT, because the allocation is a mere return of capital contribution, and therefore not a taxable event. (BIR Ruling No. DA-192-2001 dated October 17, 2001) 3. The deeds of conveyance or assignment that will be executed by the Property Owner and the Property Developer whereby they will allocate unto each other their shares, in consideration of their respective contributions is not subject to DST imposed under Sec. 196 of the Tax Code of 1997, as amended, because the allocation is made without monetary consideration and is not in connection with a sale. The allocation is made merely to segregate the saleable area between the parties, as the return of the capital which each has contributed. However, the acknowledgement to said deeds of conveyance or assignment is subject to DST pursuant to Sec. 188 of the same Tax Code, as amended. (BIR Ruling No. DA-240-2001 dated November 16, 2001) ScaHDT The transfer is also not subject to VAT since under Sec. 105 of the Tax Code of 1997, as amended, any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services and any person who imports goods shall be subject to VAT imposed in Sec. 106 to Sec. 108 of the same Tax Code, as amended. Hence, by contributing its parcels of land, the Property Owner, neither sells, barters, exchanges goods, properties nor renders services to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001; BIR Ruling No. DA-115-2001 dated September 5, 2001) It is understood however, that 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 CWT under RR No. 2-98, as amended by RR No. 6-2001 or capital gains tax under Section 27 (D) (5), as the case may be. Moreover, such sale shall be subject to DST imposed under Sec. 196 of the 1997 Tax Code, as amended, based on the gross selling price or fair market value of the property, whichever is higher. Furthermore, the said sale shall likewise be subject to VAT. 4. This will authorize the RDO of the revenue district where the properties are located to issue the corresponding Certificate Authorizing Registration/Tax Clearance Certificate with regard to the issuance of titles to the units and/or parking slots in the Project to the co-venturers based on their respective allocations without need of presentation of proof of payment of the CWT, VAT and DST. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. DTAcIa Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service