BIR Ruling [DA-175-02]

September 24, 2002 BIR RULING [DA-175-02] 22 (B), 27 (A), 196, 57 (B) DA-155-2001 Ayala Land, Inc. Tower One, Ayala Triangle Ayala Avenue, Makati City Attention: Atty. Ma. Angeli L. Ferrer Department Manager-Legal Department Gentlemen : This refers to your letter dated August 26, 2002, quote as follows: "We respectfully request confirmation of our opinion that the (1) joint development and construction of a residential subdivision by Ayala Greenfield Development Corporation ("AGDC") and Alexander A. Limjoco, Jr., Joseph Gabriel A. Limjoco, Patricia A. Limjoco, and Kristina A. Limjoco 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 (the "Tax Code"), and (2) the allocation of their respective interests in the project, and the execution of the Deed of Partition to implement such allocation, is not a taxable event and is not subject to income/expanded withholding tax, value-added tax, and documentary stamp tax under Section 196 of the Tax Code. "Background "Alexander Limjoco Jr., Joseph Gabriel A. Limjoco, Patricia A. Limjoco, and Kristina A. Limjoco (singly, a "Landowner", collectively the "Landowners") are the registered co-owners of Lot 2477-D-1 with an area of approximately 50,000 square meters located in Barangay Maunong, Calamba, Province of Laguna (the "Gross Parcel"), . . . (The Gross Parcel presently forms part of Transfer Certificate Title No. T-439925.) The Landowners are not real estate dealers nor engaged in the real estate business. "On July 4, 2002, the Landowners entered into a Joint Development Agreement (the "Agreement") with AGDC, a corporation engaged in the development of real estate, for the development of the Gross Parcel as an integral part of the Ayala Greenfield Estates, an existing residential subdivision project (the "Project") located in Calamba, Laguna. The project consists in the planning, construction and development of the Gross Parcel and the marketing and sale of developed lots (the "Salable Lots"). The specific terms of Agreement are as follows: "(a) The Landowners shall contribute to the project their undivided interest in the Gross Parcel. AGDC shall finance the entire cost of planning and developing the Project by contributing the cash necessary for the development and construction of the entire Project. "(b) In return for their respective contributions to the Project, the Landowners and AGDC shall share the distribution of the Salable Lots comprising the Project proportionate to their respective contributions. In determining their respective shares in the Salable Lots, each of the Parties was credited with an agreed value for their contribution (the "Reference Value"). The landowners shall each be allocated and receive for each phase of the Project whole Salable Lots which, taken in total, shall equal to or not exceed 40% of the aggregate Reference Value of all the Salable Lots in each phase. This translates into not more than 5 Salable Lots for each Landowner. AGDC, on the other hand, shall be allocated and receive, in the form of whole Salable Lots, the balance of the 60% of the aggregate Reference Values of all Salable Lots in the phase. The remaining portions of the phase not constituting Salable Lots consisting of road lots, easements, and open spaces shall be allocated to AGDC. "(c) The actual distribution to the Landowners and AGDC of the Salable Lots as their respective Allocations shall be effected through the execution of a Deed of Partition to segregate the Allocations between the parties for each phase of the Project. The Deed of Partition shall be executed without monetary consideration. Prior to the execution of such Deed of Partition, the parties shall have a prorated interest in the project on the basis of the pro rata allocation specified above. "(d) After distribution of their respective Allocations, each of the individual Landowners and AGDC shall respectively maintain separate ownership of such allocated Salable Lots and may sell or transfer the same to third parties. Should any such sale be made by the parties, the same shall be made independently of the other, and without pooling their profits and resources with the other parties. xxx xxx xxx "In view of the foregoing, we respectfully request for confirmation of our opinion and a ruling thereon that: "1. The joint venture whereby the Landowners will contribute the Gross Parcel and AGDC will contribute the cash for the development of the entire Project does not 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) of the Tax Code. "2. The allocation and distribution of their respective shares in the Project consisting of Salable Lots in consideration for their respective contributions to the joint venture is not a taxable event, hence, is not subject to the regular corporate income tax under Section 27(A) of the Tax Code, nor creditable withholding tax under Revenue Regulations No. 2-98, as amended, nor the value-added tax under Section 106 of the Tax Code because the allocations is a mere return of capital that each of the parties has contributed to the Project. "3. The Deed of Partition to be executed by the parties whether they allocate and distribute among them their respective shares in each phase of the Project in exchange for their respective contributions is without monetary consideration, hence, is not subject to value-added tax under Section 106 of the Tax Code, income/creditable withholding tax under Revenue Regulations No. 2-98, as amended, and the documentary stamp tax under Section 196 of the Tax Code. "4. Consequently, the confirmation of this request will authorize the Revenue District Officer (RDO) of the revenue district where the Gross Parcel is located to issue the corresponding Tax Clearance Certificate with regard to the transfer of the Gross Parcel to the individual Landowners and AGDC based on their respective Allocations without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax and value-added tax. "5. In the event, however, that the joint venture partners subsequently sell their respective allocations of the Salable Lots, such sale be subject to income tax, value-added tax imposed under Section 106 (as may be applicable), and documentary stamp tax imposed under Section 196 of the Tax Code." In reply, please be informed as follows: 1. 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. CDTSEI P.D. No. 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) 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, the joint ventures formed by them should not be considered an additional income tax lien. 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 entered into by and between the Landowners and AGDC is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. 2. The allocation of saleable area of the project between the Landowners and AGDC in consideration of their respective contribution, as stipulated in the Deed of Partition 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. The Landowners did not convey or transfer their ownership or interest over their parcels of land when they contributed the aforesaid landholdings to the joint venture. The said contribution constituted their capital contribution to the joint venture project, therefore, such contribution is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax. The transfer is also not subject to VAT, since the transfer is not in the course of business but a capital contribution. The Deed of Partition whereby the Landowners and AGDC 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 acknowledgment to said Deed of Partition is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. 3. However, 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 regular income tax rate under Sections 24(A) or 27(A) of the Tax Code of 1997, and to the creditable withholding tax under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001. Moreover, the sale shall be subject to VAT (as may be applicable) and shall likewise 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 properties, whichever is higher. 4. 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) with regard to the transfer of the Gross Parcel to the Landowners and AGDC based on their respective Allocations 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 ascertained that the facts are different, then this ruling will be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service