BIR Ruling [DA-204-03]

June 30, 2003 BIR RULING [DA-204-03] 22 (B) DA-138-02 Finman Consultants and Management Services Rm. 209 Criscor Bldg., 1258 Quezon Avenue Quezon City Attention: Ms. Luzviminda R. Molino Accountant Gentlemen : This refers to your letter dated May 26, 2003 quoted as follows: "1. On March 28, 2000, my clients, Apex Philippines & Development, Inc. and Masagana Management Services Corporation, entered into a Joint Venture Agreement with Sta. Lucia Realty Development Inc. for the development of their 73,592 sq.m. property located at Pasig City into a residential subdivision, wherein the parties agree on a sharing of 60-40 of sales proceeds. The parties agree, that upon segregation, their sharing of 60-40 interest (40% in favor of Sta. Lucia Realty & Development, Inc. while 60% shall belong to the Owner), shall be reflected in the subdivided titles. . . . "2. Par. 10 of their agreement, provides that the 60-40 shall be indicated in all subdivision titles. "I 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 Apex Philippines & Development Corporation, Inc. and Masagana Management Services Corporation assign unto Sta. Lucia Realty & Dev., Inc., its corresponding 40% share on the resultant subdivision lots by virtue of the latter's compliance of its obligation under the joint venture agreement, being the developer of the project? The lots subject for development are covered by TCT Nos. PT-82966 and T-96056; "2. What would be the taxes involved when the parties together in one document, eventually sell the 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, goal, 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 wit 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 the Owners and the Developer is not subject to income tax under Section 27 of the Tax Code of 1997. The assignment by Apex Philippines & Development Corporation and Masagana Management Services Corporation 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 Owners and the Developer will allocate unto each other their share in the saleable area, in consideration of their respective contributions are not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 because the allocations are made without monetary consideration and are not in connection with a sale. The allocations are 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 ) DHIETc 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 their parcels of land, Apex Philippines & Development Corporation and Masagana Management Services Corporation, 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service