BIR Ruling [DA-197-02]

November 6, 2002 BIR RULING [DA-197-02] 22 (B), 27 (A), 196, 57 (B) DA-096-2000 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 October 17, 2002 quoted as follows: "We respectfully request confirmation of our opinion that (1) the joint development and construction of a residential subdivision by Santiago Land Development and Corporation Ayala Land, Inc. 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 "Santiago Land Development Corporation ("SLDC") is a corporation duly organized and existing under Philippine laws and is the registered owner of certain parcels of land with an aggregate area of approximately 16,780 square meters located in Muntinlupa City, registered under and specifically described in Transfer Certificates of Title Nos. 138779, 138780, 138783, and 156196 of the Register of Deeds of Makati City (the "Parcels"). . . . Ayala Land Inc. ("ALI") is a corporation duly organized and existing under Philippine laws and is engaged in the development of real estate. "On August 8, 2002, SLDC and ALI (collectively, the "Parties") entered into a Joint Development Agreement (the "Agreement") for the joint development of the Parcels (the "Project"). The Project consists of the planning, construction and development of the Parcels into a residential subdivision and the marketing and sale of developed lots located therein (salable developed lots being referred to as "Developed Lots"). Prior to or during the development of the Project, ALI and SLDC shall jointly cause the construction of a perimeter fence (the "Perimeter Fence") on the boundaries of the Parcels in accordance with Project specifications, with each of ALI and SLDC shouldering 50% of the costs thereof. The specific terms of the Agreement are as follows: "(a) SLDC shall contribute all its rights, title and interest in and to the Parcels that will constitute the entire area of the Project and all its rights, title and interest in and to the Perimeter Fence. "(b) ALI shall (i) contribute the necessary cash for the construction and development of the Project, (ii) contribute all of its rights, title and interest in and to the Perimeter Fence as above-described, and (iii) grant residents and occupants of the Developed Lots in the Project and their respective guests a right-of-way and access through the roads, sewer and drainage owned by ALI or its parent corporation subject in any case to reasonable rules and regulations as may be adopted and uniformly imposed on all persons utilizing the same. "(c) In return for their respective contributions of the Project, SLDC and AGDC shall share in the distribution of the Developed Lots comprising the Project proportionate to their respective contributions. In determining their respective shares in the Developed Lots, each of the parties is credited with an agreed value for their contribution known as the "Reference Value" (defined as the Peso value to be assigned by ALI to a Developed Lot equal to the gross selling price if purchased by a buyer on deferred payment basis). SLDC shall be allocated and receive whole Developed Lots which, taken in total, shall equal to or not exceed 55% of the aggregate reference value of all the Developed Lots in the projects, and ALI shall be allocated and receive, in the form of whole Developed Lots, the balance of 45% of the aggregate Reference Values of all the Developed Lots in the Project. The remaining portions of the phase not constituting Developed Lots consisting of road lots, bridges, easements, utilities, facilities (including the Perimeter Fence) and open spaces shall be ceded to ALI. "(d) The joint venture partners shall select the Developed Lots to represent their respective allocations. The actual distribution to SLDC and ALI of the Developed Lots received pursuant to their respective allocations shall be effected through the execution of the Deed of Partition which the parties will execute without monetary consideration for each sub-phase of the Project. "(e) After distribution of the Developed Lots, SLDC and ALI shall maintain separate ownership of their allocated Developed Lots and may sell or transfer their respective Developed Lots to third parties." In view of the foregoing, you now request for confirmation of your opinion that: 1. The joint venture whereby SLDC will contribute the Parcels and ALI will contribute the cash for the development of the entire Project does 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 of 1997. 2. The allocation and the distribution of their respective shares in the Project consisting of Developed Lots in consideration of 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 Regulation No. 2-98, as amended, nor the value-added tax under Section 106, 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 SLDC and ALI whereby 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 Parcels are located to issue the corresponding Tax Clearance Certificate with regard to the transfer of the Developed Lots to SLDC 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. 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 SLDC and ALI is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. 2. The allocation and distribution of the Developed Lots between SLDC 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. SLDC 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 SLDC'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. LLphil 3. The Deed of Partition whereby SLDC and ALI will allocate unto each other their share in the Developed 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 developed 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 Parcels 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 SLDC 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. 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 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