BIR Ruling [DA-201-03]

June 26, 2003 BIR RULING [DA-201-03] 22 (B) DA-138-02 Finman Consultants and Management Services Rm. 209, Criscor Bldg.,1258 Quezon Avenue Quezon City Attention: Ms. Luz Molino Certified Public Accountant Gentlemen : This refers to your letter dated June 9, 2003 quoted as follows: "1. On January 18, 2002, my client, Massive Ready Mixed Concrete (herein referred to as the Owner) entered into a Joint Venture Agreement with Sta. Lucia Realty Development Inc. (herein referred to as the Developer) for the development of its property located at Bo. San Isidro, Municipality of Taytay, Province of Rizal, with an area of 7,939 sq.m. covered by TCT No. 569426, and the parties agree on a sharing of 60-40 on the resultant subdivided lots, in favor of the DEVELOPER. ... "2. The parties agreed under par. 6, that the OWNER shall execute and deliver the 60% share of subdivision lots (other than the road lots and easement) to the DEVELOPER, as its developer's fee under the said agreement, upon approval of the subdivision plan. Now the subdivision plan has been approved by the Land Management Bureau under Psd-04-123623 and the OWNER is now ready to convey the 60% share of subdivision lots to the DEVELOPER, consisting of around 24 lots, including the road lots and easement (as this would be eventually donated to the LGU or the Homeowners' Association) so that the titles of these lots, including the road lots and open spaces, could be registered in the name of the DEVELOPER. "We would like to request for an opinion or ruling on the tax consequences of the following transactions: "1. What would be the taxes involved when Massive Realty Mixed Concrete assigns unto Sta. Lucia Realty & Dev. Inc.,the above-mentioned subdivision lots formerly covered by TCT No. 569426 as the DEVELOPER has complied with its developmental obligation under the said joint venture agreement. "2. What would be the taxes involved when the parties eventually sell their share of subdivision lots to the buying public?" 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 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 as additional income tax lien. AEHCDa 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 the Owner and the Developer is not subject to income tax under Section 27 of the Tax Code of 1997. The assignment by Massive Ready Mixed Concrete to Sta. Lucia Realty Development, Inc. of its corresponding share of the resultant 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 aforestated assignment is a mere return of capital contribution, and therefore not a taxable event. ( BIR Ruling No. DA-192-2001 dated October 17, 2001 ) The Partition Agreement whereby the Owner 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 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, Massive Ready Mixed Concrete, 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 areas 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, such 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 shall be considered null and void. EaScHT Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service