BIR Ruling [DA-207-03]

July 4, 2003 BIR RULING [DA-207-03] 27 (D) (5); 196; 188 DA-188-2002 Cocochem United Coconut Chemicals, Inc. UCPB Building, Makati Avenue Makati City Attention: Atty. Ingrid S. Dungca Manager, Corporate Services Department Gentlemen : This refers to your letter dated May 26, 2003 requesting for a confirmation of your opinion that: 1. The MOA to be executed by COCOCHEM and CAIP, INC., as described in your letter a copy of which will be annotated on the back of the title to the property to be used in the PROJECT, will not give rise to a taxable transaction and is subject only to the documentary stamp tax of P15.00 imposed on the notarial acknowledgment of the MOA under Section 188 of the Tax Code, as amended. Upon payment of the said documentary stamp tax and presentation of the proof of payment, the Registry of Deeds is authorized to annotate the MOA on the back of the title to the property to be used in the PROJECT. 2. The contribution of COCOCHEM to the PROJECT in the form of real property is not subject to the 10% value-added tax imposed under Section 106 of the Tax Code, as amended. 3. The assignment of PROPERTIES by COCOCHEM in favor of CAIP, INC., is not subject to any tax imposed under the Tax Code, as amended. The facts as represented, are as follows: 1. COCOCHEM is the registered owner of 232,687 square meters of land located at the COCOCHEM AGRO-INDUSTRIAL PARK-special economic zone (hereinafter referred to as "CAIP-SEZ") in Brgy. Aplaya, Bauan, Batangas, covered by various TCT's and is the present location of its oleochemical manufacturing plant facilities. 2. As a pre-registration condition, the Philippine Economic Zone Authority (PEZA) required that COCOCHEM establish a new entity to handle its activity as Developer/Operator of CAIP-SEZ. PEZA gave its position that it will not allow COCOCHEM to be an Ecozone Export Enterprise locator and at the same time the Developer/Operator of the ecozone. 3. In view of this, COCOCHEM incorporated a wholly-owned subsidiary, CAIP, INC., on June 21, 1999 that will handle full development and management of the 42-hectare industrial park and the power project (hereinafter referred to as the "PROJECT"). 4. Last 19 December 2002, COCOCHEM signed its Registration Agreement with PEZA as an Ecozone Export Enterprise. Under this registration, COCOCHEM is now subject to the 5% Gross Income Tax incentive effective Jan. 1, 2003 in lieu of all national and local taxes. This is in accordance with Section 24 of Republic Act No. 7916 (the PEZA LAW). 5. Thus, COCOCHEM had to effect the transfer of the Developer/Operator activity to CAIP, INC. However, COCOCHEM shall retain legal title to the property, and only the use of the land and facilities will be contributed to CAIP, INC., for development. 6. In view of the above, COCOCHEM and CAIP, INC. proposed to execute a Memorandum of Agreement ("MOA"), which defines their respective rights, duties and responsibilities relative to the development and marketing of CAIP-SEZ. CHTcSE 7. Under the MOA: "PROPERTIES" is defined as LAND and use of land and facilities, as well as rental income and any other form of income from Developer/Operator activity, including but not limited to steam, power, nitrogen, use of weighbridge and pier facilities. COCOCHEM will contribute PROPERTIES to the PROJECT. For this purpose, COCOCHEM will assign the use of PROPERTIES to CAIP, INC., without any monetary consideration and solely for the purpose of complying with the PEZA requirements. The MOA will be annotated at the back of the title to the property in order to serve notice and bind third parties as to the existence of the MOA and the obligations of the parties thereto. The MOA will not of itself operate to transfer title of the property; COCOCHEM will assign its PEZA registration as the DEVELOPER/OPERATOR of the CAIP-SEZ under the Amended Certificate of Registration No. EZ-97-05 dated 17 January 2003; CAIP, Inc. will develop/administer PROJECT and will assume the cost of the physical development, operation, maintenance and marketing of CAIP-SEZ. These costs shall form part of its operating expenses; The CAIP-SEZ development plans shall be subject to the approval of COCOCHEM; CAIP, INC. shall be appointed as the marketing, management and collection agent of COCOCHEM for all income related to the ecozone developer activity and the power project. The profit generated during the initial phases of the development and management of the CAIP-SEZ shall be plowed back for use in the succeeding development phases. The income of CAIP, Inc. not needed for further development work will be paid to COCOCHEM in the form of dividends. In reply, please be informed of the following: 1. The MOA executed between COCOCHEM (the Owner of PROPERTY) and CAIP, INC. (the Developer/Operator) is an agreement between the parties to transfer the use of the land and facilities from the owner to the developer, in compliance with PEZA requirements which is neither a contract of sale over real property nor an instrument, which conveys title to a real property. Hence, no income tax or documentary stamp tax (DST) is due upon the execution of the MOA (Section 186 of Revenue Regulations No. 26) However, the notarial acknowledgment on the MOA is subject to the DST on certification pursuant to Section 188 of the 1997 Tax Code. Section 22(B) of the 1997 Tax Code, provides: "(B) The term corporation shall include 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. "General professional partnership" are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. From the foregoing definition of a corporation, we confirm your opinion that the parties to the MOA (CocoChem and CAIP, Inc.) may file separate income tax returns for their net revenue for the above-mentioned project less their respective proportionate share in the MOA expenses since the agreement contemplating joint venture is not embraced within the meaning of the term "corporation", hence, not subject to the corporate income tax imposed under Section 27(A) of the 1997 Tax Code. (BIR Ruling No. 002-97 dated January 14, 1997) However, the parties to the MOA are separately subject to the regular corporate income tax on their taxable income during each taxable year respectively derived by them from the aforesaid project. Accordingly, the Register of Deeds of Batangas City is authorized to annotate the MOA at the back of the Transfer Certificates of Title of lands subject of the MOA. (BIR Ruling No. DA-015-99 dated January 11, 1999) . It is to be understood, however, that upon subsequent disposition by COCOCHEM and CAIP, INC. of subject PROPERTIES, the gain that may be realized from such sale will be subject to the regular income tax provided under the pertinent provision of the Tax Code, as amended and to be expanded withholding tax under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001. (BIR Ruling No. DA-324-2000 dated August 25, 2000) 2. The contribution by COCOCHEM to the PROJECT of real properties through the assignment of its use to CAIP, INC. is not subject to 10% VAT imposed under Section 106 of the Tax Code, as amended. The contribution of COCOCHEM to the PROJECT is not subject to the 10% VAT because the transfer is not made in the course of business. The transaction is not in the nature of "sales, barters, exchanges and leases of goods and properties, or rendering services" as defined under Section 105 of the 1997 Tax Code but only a capital contribution and that the same property being transferred to the PROJECT is a capital asset. Therefore, said transaction is not subject to VAT. (BIR Ruling No. DA-140-2000 dated March 8, 2000) . 3. The assignment by COCOCHEM of PROPERTIES to CAIP, INC. will not be subject to any tax imposed under the Tax Code, as amended. The transfer or assignment of rights over real property to another without monetary consideration will not be subject to any tax imposed under the Tax Code because the transfer does not have the effect of a sale, exchange or disposition, nor does it vest title on the real property to the transferee that would give rise to a taxable event. Thus, no taxable income will be generated and no income and/or capital gains tax is payable or collectible. Accordingly, the deed covering the assignment is also not subject to the 1.5% documentary stamp tax on sales or conveyances of real property imposed under Section 196 of the 1997 Tax Code but only to the documentary stamp tax of P15.00 provided under Section 188 of the same Code. (BIR Ruling Nos. 108-98 dated June 29, 1998 and DA-154-2001 dated September 5, 2001) . 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 shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service