BIR Ruling [DA-204-01]

October 19, 2001 BIR RULING [DA-204-01] AFP Retirement and Separation Benefits System Camp General Emilio Aguinaldo Quezon City Attention: Atty. Pedro G. Herrera-Davila Vice-President-Legal Counsel Gentlemen : This refers to your letters dated January 24, 2000 and July 3, 2001 requesting for a ruling that the sale of the parcels of land assigned to AFP-Retirement and Separation Benefits System (AFPRSBS) relative to the Joint Venture Agreement entered into by it with Antipolo Properties, Inc. (API) are exempt from the creditable withholding tax prescribed in Revenue Regulations No. 2-98. It is represented that on June 1, 1998, a Memorandum of Agreement (MOA) was entered into by and between API and AFPRSBS amending MOA dated November 9, 1994 relative to their Joint Venture Agreement whereby several parcels of lots were assigned to AFPRSBS, as indicated in their MOA dated November 9, 1994 and June 1, 1998 as its share in the joint venture; that although titles of the said parcels of land assigned to AFPRSBS are registered in the name of API, the said Memorandum of Agreement is annotated at the back of every title of the said parcels of land; that many buyers of the lots allocated to the AFPRSBS have already paid their accounts in full and they want to have the title of the properties transferred to their names; that AFPRSBS is an employee's trust fund established under Presidential Decree No. 361 issued on December 30, 1973, as amended by P.D. No. 1656 for the exclusive benefit of all the military members or commission officers and enlisted personnel of the Armed Forces of the Philippines (AFP); that AFPRSBS is qualified as an employee's trust under Section 60(B) of the Tax Code of 1997 and therefore income of the trust fund from its investments is exempt from income tax and consequently from the withholding tax ( BIR Ruling No. DA673-99 dated December 09, 1999 ). In reply thereto, please be informed that 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. (Sec. 22(B) of the Tax Code of 1997) EHSADa It is the intention of the legislature to exclude joint venture formed for the purpose of undertaking construction projects from the term corporation. Thus, the Joint Venture Agreement between API and AFPRSBS for the development of the above-mentioned parcels of land will not create a separate taxable entity within the meaning of the abovecited section. Accordingly, the allocation between API and AFPRSBS of the developed lots as their participating interest in the project as stipulated in the Memorandum of Agreement is not a taxable event and is not subject to income tax and consequently to withholding tax. ( BIR Ruling No. 010-96 dated January 23, 1996 ) However, when the parties subsequently sell or dispose of the developed lots which they received or will receive as their respective shares or participating interests in the projects to third parties, the gains that may be realized by the co-venturers from such sale will be subject to the regular rate of corporate income tax prescribed under Section 27 of the Tax Code of 1997. ( BIR Ruling Nos. DA 212-99 dated April 07, 1999, DA 187-00 dated March 25, 1999; DA 264 dated May 5, 1999 ) However, since AFPRSBS has been qualified as an employee's trust under Section 60(B) of the Tax Code of 1997, any income derived by the trust fund from its investments shall be exempt from income tax and consequently from withholding tax. ( BIR Ruling No. DA673-99 dated December 09, 1999 ) Accordingly, it is the opinion of this Office that the sale of the lots allocated to AFPRSBS pursuant to the aforecited Memorandum of Agreement is not subject to income tax and consequently to the withholding tax prescribed in Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001, as amended. Moreover, the sale of the developed lots allocated to AFPRSBS is likewise not subject to value-added tax prescribed in Section 106(A) of the Tax Code of 1997 since the above-mentioned lots are not held primarily for sale to customers or held for lease in the ordinary course of trade or business but intended for the members of the AFPRSBS. However, it shall be subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997 based on the actual consideration or fair market value determined in accordance with Section 6(E) of the said Code, whichever is higher. This ruling is being issued based on 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Acting Assistant Commissioner Legal Service