BIR Ruling [DA-185-01]

October 12, 2001 BIR RULING [DA-185-01] 22 (B), 27, 196 DA-084-2001 Mr. Cesario C. Leynes Revenue District Officer Revenue District No. 42 San Juan, Metro Manila S i r : This refers to your 1st Indorsement dated July 27, 2001 requesting for a clarification as to whether or not Arpen Real Estate Development, Inc., et. al., is exempt from documentary stamp tax under Section 173 and/or Section 196 of the Tax Code of 1997 on its Deed of Assignment dated December 8, 1999 and various dates in connection with BIR Ruling No. DA-119-2001 da te d J ul y 10, 2001. The said ruling dealt on the tax consequence of the assignment/transfer by Arpen real Estate Development, Inc. (transferor/developer) of certain floors or units and parking slots to Rolando A. Noriega as owner of the land where the Le Gran Condominium was constructed. We quote the dispositive portion of the said ruling thus: "In reply, please be informed that pursuant to Section 22(B) of the Ta x Co de of 1997, the term 'corporation' shall 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 or 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. In view thereof, it is our opinion that the joint venture of Arpen Real Estate Development, Inc., as developer, and Rolando A. Noriega, as lot owner, for the construction of the "Le Gran Condominium" is not subject to the corporate income tax under Section 27 of the Ta x Co de of 1997. However, the co-ventures are separately subject to the regular corporate/income tax on their taxable income during each taxable year respectively derived by them from the sale of their respective shares in the condominium. "Considering the foregoing, the Memorandum of Agreement executed by Arpen Real Estate Development, Inc. and Rolando A. Noriega for the construction and development of the Le Gran Condominium, and the allocation of their specific floors or units therein and parking slots in the project will not give rise to a separate taxable joint venture within the meaning of Section 22(B), in relation to Section 27(A) of the Ta x Co de, and that the allocation between Arpen Real Estate Development, Inc. and Rolando A. Noriega of the floors or units therein and parking slots in consideration of their contribution in the project, as stipulated in the Memorandum of Agreement, is not a taxable event and is not subject to income/withholding tax because the allocation is a mere return of the capital that each has contributed to the Project. However, should Arpen Real Estate Development, Inc. and Rolando A. Noriega sell any of the floors or portions of the floors allocated to them to third parties, the gain that may be realized by them from such sale effective January 1, 2000 will be subject to the regular income tax under the Ta x Co de of 1997, and to the creditable/expanded withholding tax (EWT) under Revenue Regulations N o. 2 -98, as amended (BIR Ruling No. 274-92 dated September 30, 1992; BIR Ruling No. UN-025-95 dated January 11, 1995; and BIR Ruling No. DA-488-98 dated November 16, 1998), and necessarily, the said transaction shall be subject to the documentary stamp tax imposed under Section 196 of the s ame C ode." In reply, please be informed that as clearly and correctly stated in the said ruling, the allocation between Arpen Real Estate Development, Inc. and Rolando A. Noriega of the floors or units and parking slots in Le Gran Condominium in consideration of their respective contribution in the project, as stipulated in the Memorandum of Agreement, is not a taxable event and is not subject to income/withholding tax because the allocation is a mere return of the capital that each has contributed to the project. Suffice it to say that Section 173 of the Ta x Co de of 1997 will not apply in this case since what is exempt is the transaction and not the parties involved. On the other hand, since the allocation of certain floors or units and parking slots to the developer and owner of the land is made without monetary consideration and is not in connection with a sale but is merely a return of the capital that each has contributed to the project, no gain is realized. Accordingly, Section 196 of the Tax Code of 1997 will not also apply. However, should the developer and the owner of the land sell any of the floors or portions of the floors allocated to both of them to third parties, the gain that may be realized by them from such sale effective January 1, 2000 will be subject to the regular income tax under the Tax Code of 1997, and to the creditable/expanded withholding tax (EWT) under Revenue Regulations No. 2-98, as amended. Then and only then that the said transaction shall be subject to the documentary stamp tax imposed under Section 196 of the same Code. The only documentary stamp tax that is applicable in the instant case is the acknowledgment on the Memorandum of agreement which is covered by Section 188 of the Tax Code of 1997. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group