BIR Ruling [DA-188-02]

October 17, 2002 BIR RULING [DA-188-02] 22 (B), 27 (A), 196, 57 (B) DA-062-2002 Cabrillas Abugan and Associates Law Firm L12 Blk4 Suburban Heights Cainta, Rizal Attention: Atty . James K. Abugan Partner Gentlemen : This refers to your letter dated September 9, 2002 requesting in effect for a ruling on the tax implication of the joint venture agreement which your client, Sta. Lucia Realty and Development, Inc. (Sta. Lucia for brevity) had entered into for the construction and development of one entire consolidated complex (consisting of a residential subdivision, a commercial center and a golf course), hereinafter referred to as Beverly Residential, Commercial Subdivision with a Golf and Country Club, Inc. (Project). It appears that Jose S. Singian, Josephine S. Franco, Arturo D. Toledo, Librado Ayson, Franklin D. Matsuda, Genaro D. Capil, Jr., Paterno Rance, Erwin S. Dizon, Onofre V. Barin, Ludivina S. Dizon, Jeffrey S. Dizon, Joel D. Matsuda, all represented by Tomas D. Dizon, Asia Textile Mills, Inc., Rosendo Ong, Santiago Lee, Tomas Tanchip, Gabriel Uy, Albert Pabilona, Arturo, Ernesto, Josefina, Renato, Jesus, Felixberto Antonio, all surnamed Panganiban, Ma. Cristina Panganiban-Tulio, Pacita Realty and Development Corporation, L.C. Lopez Resources, Inc. and Nobleman Properties, Inc. (hereafter collectively referred as Landowners) entered into several Joint Venture Agreements/Memorandum of Agreements (Agreements) with Sta. Lucia for the development and construction of the Project located at Barangays Masamat, San Rafael, Sabanilla, Lagundi, Municipality of Mexico, Pampanga; that the aggregate area of the properties subject to development is 300 hectares, more or less; and that the aforestated Agreements essentially stipulated as follows: 1. The Landowners shall contribute and pool together their respective properties to form part of the Project or the entire consolidated properties to be developed; 2. Sta. Lucia will perform the development and construction works for the entire Project, including the provision of expenses to secure the necessary permits from government offices, and in some instances will also contribute parcels of land which was acquired by it thru purchase; and 3. In consideration of, and in return of the respective contributions of the Landowners and Sta. Lucia, the aforenamed parties latter shall each receive portions of the Project and percentage of shares from the Golf and Country Club, that will thereafter be incorporated, in accordance with the parties arrangements as stated in the several Agreements executed by them. You now request for an opinion as to the tax liabilities of the parties in the event that: "1. That the landowners assign to Sta. Lucia Realty & Dev., Inc., its developer's fee in terms of saleable lots (either residential or commercial lots) and the club shares for developing the golf course, country club and its facilities; "2. When the club shall have been formed and shall issue the corresponding club shares to the lot owners in return for their land contribution to the area allocated for the golf course, country club and its facilities, what would be the tax obligation of the lot owners when they assigned their lots to the club? How about the Club, when it issues the club shares to the lot owners? HcaDTE "3. How about Sta. Lucia Realty Dev., Inc., the developer of the project, what would be its tax liability when it receives its club shares by virtue of its development or in exchange for land (as some of the lots were purchased directly by Sta. Lucia? What would also be tax liability of Sta. Lucia when they sell the club shares to the public? "4. What would be the tax liability of the lot owners once they receive their titles to their share of subdivision lots and decide to sell the same? What would also be their tax liability should they sell their club shares?" In reply, please be informed that pursuant to Section 22 (B) of the Tax Code of 1997, the term "corporation" includes 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. 29 amended the definition of the taxable corporation as not 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 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 Sta. Lucia and the Landowners is not subject to income tax under Section 27 of the Tax Code of 1997. The assignment by the Landowners to Sta. Lucia of its corresponding share of the saleable lots, in the aforesaid project is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax, because the above-stated assignments is a mere return of capital contribution, and therefore not a taxable event. ( BIR Ruling No. DA-192-2001 dated October 17, 2001 ) In the same manner, the conveyance by the Golf and Country Club of its club shares each to the Landowners and Sta. Lucia for their lot contribution and development efforts, respectively, is exempt from the payment of the regular income tax/creditable withholding tax. Inasmuch as the Landowners did not cede their ownership or interest over their parcels of land when they contributed their landholdings to the Golf and Country Club for the reason that the above-mentioned transfer is merely pooling of resources to a common fund, said transfer is likewise not subject to 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 Partition Agreement whereby the Landowners and Sta. Lucia will allocate unto each other their share in the saleable lots and the club shares, in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 or 176 of the Tax Code of 1997, as the case may be, 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 acknowledgment to said Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. ( BIR Ruling No. DA-240-2001 dated November 16, 2001 ) The transfer is also not subject to VAT since under Section 105 of the Tax Code of 1997, 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 Sections 106 to 108 of the same Tax Code. Hence, by contributing the parcel of land, the Landowners, as well as Sta. Lucia, neither sells, barters, exchanges goods, property 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 saleable lots and club shares allocated to them, the gain that may be realized by them from such sale will be subject to the creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001. Moreover, the aforesaid sale of the lots 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. Likewise, said sale of the club shares by any of the parties shall be subject to documentary stamp tax under Section 176 of the same Tax Code. Finally, said sales shall also 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 shall be considered null and void. ITScAE Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service