BIR Ruling [DA-192-01]

October 17, 2001 BIR RULING [DA-192-01] 22 (B), 27 (A), 196, 57 (B) DA-155-2001 Sta. Lucia Realty & Development, Inc. Ground Flr., State Financing Building Ortigas Avenge, Mandaluyong City Attention: Atty. Miriam G. Daway Legal Counsel Gentlemen : This refers to your letter dated August 24, 2001 stating that Landco Urdaneta Properties, Inc. (Owner), a corporation duly organized and existing under and by virtue of Philippine laws, is the absolute and registered owner of several parcels of land situated in the City of Urdaneta, Province of Pangasinan, with an aggregate area of 292,857 sq. m. covered by Transfer Certificates of Title (TCT) Nos. 226571, 226570, 226569, 105505, 159153, 226006, 89686, 152091, 151814, 159154, 105899, 21629, 181535, 167957, 89684, 104557, 109542, 100337, 131106, 16758 and 60747; that the Owner after having been convinced of the capacity and ability of Sta. Lucia Realty & Development, Inc. (Developer) in the development of prime residential subdivisions has agreed with the latter for the development of its aforementioned parcels of land; and that both parties have entered into a Development Agreement, in which they agreed on the following: xxx xxx xxx "I. OBLIGATIONS OF THE OWNER "The OWNER shall contribute the Property for development by the Developer into a residential subdivision. . . "II. OBLIGATIONS OF THE DEVELOPER "The DEVELOPER shall contribute managerial expertise, experience, organization and financial resources to develop the Property into a residential subdivision. . . xxx xxx xxx "D. That the DEVELOPER at its own expense shall survey and prepare the subdivision plans in accordance with the rules and regulations as required by LGU concerned, Housing and Land Use Regulatory Board, Bureau of Lands and such other government agencies that regulate or control or may hereinafter regulate or control the construction and development of residential subdivisions; "E. The DEVELOPER shall secure and pay for all the necessary licenses plus the cost of the required bonds, permits, approval from the Local Government, Bureau of Lands, City Government, HLURB, PANELCO and all other government agencies having authority on residential subdivision development with full cooperation by the OWNER; xxx xxx xxx "III. JOINT DETERMINATION OF DEVELOPMENT PLANS STRATEGIES: "A. All development/subdivision plans shall be subject to the conformity and approval of the OWNER whose representatives shall have a right of visitation and inspection at any time on the subdivision site; "B. The OWNER and the DEVELOPER shall jointly determine the following strategies: "1. The size, scope and extent of the saleable area; "2. Selling price, timing and the number of lots to be sold for each selling period, pricing and payment terms for each selling period; price increases, discounts and other terms/conditions affecting the sale; "IV. DISTRIBUTION OF LOTS "A. The OWNER agrees to compensate, the DEVELOPER in the form of residential lots constituting fifty-percent [50%] of the net saleable area. The other fifty-percent [50%] of the net saleable shall constitute the share of the OWNER. . . " In view of the foregoing, you now request for a legal opinion relative to: a) the tax liability of the Owner if it assigns to the Developer its corresponding share of subdivision lots in the project and the taxes due thereon; and b) the tax implication for both parties when they sell the afore-stated lots to their respective buyers: 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 the Landowner and the Developer is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. 2. The Owner's assignment to the Developer of its corresponding share of subdivision 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 allocation is a mere return of capital that each has contributed and therefore, not a taxable event. The transfer is also not subject to VAT, since the transfer is not in the course of business but a capital contribution. 3. However, upon the subsequent disposition by the co-ventures 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 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. The Partition Agreement whereby the Landowner and the Developer 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 Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Acting Assistant Commissioner Legal Service