BIR Ruling [DA-170-03]

May 30, 2003 BIR RULING [DA-170-03] 22 (B) Casimiro Development Corporation Real Street, Zapote, Las Pias City Attention: Mr. Teofilo P. Casimiro President Gentlemen : This refers to your letter dated May 19, 2003 requesting clarification on the tax implication relative to the joint venture formed by the Domingo T. Miranda, et. al, as Owners and Casimiro Development Corporation, as Developer, to their Joint Venture Agreement (JVA). It is represented that Domingo T. Miranda, et al. are the absolute and registered co-owners of several parcels of land located in Bacoor, Cavite covered by TCT Nos. T-875323, T-875330, T-875329, T-875328, T-875327, T-875325, T-875324, T-875326, T-875322, T-1033227 with a total land area of 13,190 square meters; that on the other hand, Casimiro Development Corporation, a domestic corporation organized and existing under the laws of the Philippines, is also a registered owner of two (2) parcels of land located in Bacoor, Cavite covered by TCT Nos. T-831450 and T-994696 with an aggregate area of 569 square meters; that on March 1, 2002 and April 1, 2002, a JVA and Supplemental to Joint Venture Agreement were entered into by and between the Owners and Developer to develop the aforementioned properties into a residential subdivision known as Coastal Woods Village Phase 2 under the design standards of PD 957; that the said project is duly registered with the Housing and Land Use Regulatory Board (HLURB) under Certificate of Registration No. 06973-R4A03-03 and License to Sell No. 07252-R4A03-03 both dated March 31, 2003; and that some of the special features of the JVA are as follows: (1) The developed saleable lots of the project shall be shared fifty percent (50%) by the Owners and fifty percent (50%) by the Developer; (2) That in accordance with the stipulation of the aforesaid Agreement, the total saleable area of the subdivision plan shall be correspondingly placed in the name of the Owners and Developer in its individual title as indicated in the summary of lots assigned to Owner's and Developer. All individual title of all road lots, open spaces and non-saleable areas shall be placed in the name of the Developer; and (3) Upon issuance of the respective individual titles of saleable lots in the names of the Owners and the Developer, each party shall have the exclusive right to sell their respective developed saleable lots with or without housing components to the general public. In case the Owner should prefer to engage the services of the marketing arm of the Developer, the same may be undertaken subject to terms and conditions as may be agreed upon under a separate agreement; In reply thereto, please be informed that 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 (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. It is to be emphasized, however, that P.D. 929 excluded joint venture formed for the purpose of undertaking construction projects from the definition of the term "Corporation" because (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. 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 Agreement entered into by the above-named Owners and Casimiro Development Corporation, as Developer, for the development and subdivision of the aforesaid property into a residential townhouse subdivision known as the Coastal Woods Phase 2 is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997. Moreover, the transfer of the property by the Owners to the Developer pursuant to their JVA is not subject to the capital gains tax and to the documentary stamp tax under Sections 24(D)(1) and 196 of the Tax Code of 1997. However, the certification is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the said Code. ESTDcC However, the co-venturers are separately subject to the regular individual and corporate income taxes on their respective taxable income during each taxable year derived by them from the aforesaid construction project. Moreover, the Joint Development Agreement entered into by and between the Owners and Developer is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the Tax Code of 1997. However, the sale of the said real property shall be subject to the documentary stamp tax under Section 196 of the said Code. Moreover, the allocation and distribution of their respective shares in the project consisting of developed lots and the housing structures built thereon in consideration of their respective contributions, as stipulated in the Joint Venture 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 ) Furthermore, since the partition to be executed by the parties allocating and distributing between them their respective shares in the project in exchange for their respective contributions is without monetary consideration but merely acknowledges and confirms the title and ownership of the above-named Owners and the Developer, the same is not subject to the value-added tax, income/creditable withholding tax nor to the documentary stamp tax respectively imposed under Sections 106, 24(c), 27(A) as implemented by Revenue Regulations No. 2-98, as amended and 196 all of the Tax Code of 1997. However, the sale of the respective share of the Owners and/or the Developer of the aforesaid property shall be subject to the creditable withholding tax, VAT and documentary stamp tax pursuant to Revenue Regulations No. 2-98, as amended, Sections 106(A) and 196 of the Tax Code of 1997. Finally, this will authorize the Revenue District Officer (RDO) of the revenue district where the property is located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the transfer of the titles to the lots to be received by the above-named Owners and Developer Based on their respective allocations pursuant to the partition without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax and value-added tax. 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, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service