BIR Ruling [DA-179-02]

October 4, 2002 BIR RULING [DA-179-02] 22 (B), 27 (A), 196, 57 (B) DA-096-2000 Ayala Land, Inc. Tower One, Ayala, Triangle Ayala Avenue, Makati City Attention: Atty. Sheila Marie L. Uriarte-Tan Senior Division Manager Legal Division Gentlemen : This refers to your letter dated September 23, 2002 quoted as follows: "We respectfully request confirmation of our opinion that (1) the joint development of a residential subdivision by Capitol Hills Golf & Country Club, Inc. (" Capitol ") and Ayala Land, Inc. (" ALI ") 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 "Capitol is a corporation duly organized and existing under Philippine laws and is the registered owner of certain parcels of land located in Balara, Quezon City, more particularly identified as the parcels of land described under Transfer Certificates of Title Nos. RT-119073 (338516), RT-119072 (338515), RT-45470 (342369), RT-119090 (338526), N-150438, RT-45471 (338520), RT-119089 of the Register of Deeds of Quezon City (collectively, the " Parcels "). ALI is a corporation duly organized and existing under Philippine laws and is engaged in the development of real estate. "On September 18, 2002, Capitol and ALI (collectively, the " Parties ") entered into a Revised and Restated Memorandum of Agreement (the " Agreement "), for the joint development of a portion of the Parcels (the " Subdivision Portion ") into a residential subdivision which the Parties have agreed to call "Ayala Hillside Estates," a high-end residential community in Balara, Quezon City (the " Project "). The Project consists of the planning, construction and development of the Subdivision Portion and the marketing and sale of developed lots located therein (a " Salable Lot "). The specific terms of the Agreement are as follows: "(a) Capitol shall contribute the Subdivision Portion (and all its rights, title and interest in and to the same) that will constitute the entire area of the Project. "(b) ALI shall contribute the necessary cash for the construction and development of the Project, perform all the development work for the Project. "(c) In consideration of, and in return for, their respective contributions to the Project, Capitol and ALI shall share in the distribution of the Salable Lots comprising the Project proportionate to their respective contributions. Thus: "(1) to Capitol shall be allocated and Capitol shall receive such number of salable Lots with an aggregate Reference Value (defined as the Peso value to be assigned to a Salable Lot determined by ALI to be the most suitable for such Salable Lot, equal to the gross selling price that a buyer will be required to pay if he was to purchase such Salable Lot on a deferred payment basis) equal to approximately (but not more than) 40% of the total Reference Value of all Salable Lots in the Project (the " Capitol Allocation "); and "(2) to ALI shall be allocated and ALI shall receive: (i) such number of Salable Lots with an aggregate Reference value equal to the difference between the aggregate Reference Value of all Salable Lots in the Project and the Aggregate Reference Value of Capitol; and (ii) all road lots, easements, utilities, facilities and open spaces in the Project, subject to the condition that ALI shall grant a perpetual right of way easement through such roads for the benefit of all the residents of the Project and their guests and shall allow residents of the Project perpetual use and enjoyment of all such open spaces and easements. ESCTIA "(d) The Parties shall select the Salable Lots to represent their respective allocations. The actual distribution to the Parties of the Salable Lots received pursuant to their respective allocations shall be effected through the execution of a Deed of Partition which the Parties will execute without monetary consideration for each sub-phase of the Project. Prior to the execution of a Deed of Partition, however, the Parties shall have a prorated interest in the Project (or a sub-phase thereof, as applicable). "(e) After distribution of the Subdivision Portion, the Parties shall maintain separate ownership of their allocated Salable Lots and may sell or transfer their respective Salable Lots to third parties." In view of the foregoing, you now request for a confirmation of your opinion that: 1. The joint venture whereby Capitol will contribute the Subdivision Portion and ALI will contribute the cash for the development of the Subdivision Portion into a residential subdivision, and other development works, 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 the respective shares of the Parties 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, nor the value-added tax under Section 106 of the Tax Code because the allocation 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 whereby they allocate and distribute between them their respective shares in 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, 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 of the revenue district where the Parcels are located, and of which the Subdivision Portion forms a part, to issue the corresponding Tax Clearance Certificate with regard to the transfer of the titles to the lots to be received by ALI and Capitol based on their respective allocations pursuant to the Deed of Partition 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 any of the Parties shall subsequently sell their respective shares consisting of the Salable Lots, such sale be subject to the regular corporate income tax under Section 27(A) of the Tax Code and the creditable withholding tax under Revenue Regulations No. 2-98, value-added tax imposed under Section 106, and documentary stamp tax imposed under Section 196, both 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. 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 Capitol and ALI is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. 2. The allocation of the Salable Lots between Capitol and ALI in consideration of their respective contributions 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. Capitol did not convey or transfer its ownership or interest over its parcels of land when it contributed the aforesaid landholdings to the joint venture. The said contribution constituted Capitol's 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. 3. The Deed of Partition whereby Capitol and ALI will allocate unto each other their share in the salable lots 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 salable lots 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. 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 titles to the lots to be received by Capital and ALI 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. The gain that may be realized by the Parties upon subsequent disposition of the areas allocated to them will be subject to the regular income tax rate under Section 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, 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 properties whichever is higher. Furthermore, the said sale shall likewise be subject to VAT. 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 will be considered null and void. ScEaAD Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service