BIR Ruling [DA-209-03]

July 4, 2003 BIR RULING [DA-209-03] 22 (B) DA-138-02 Philippine Heart Center East Avenue, Quezon City Attention: Dr. Ludgerio D. Torres, MD Director Gentlemen : This refers to your letter dated April 28, 2003 requesting for a confirmation of your opinion that: 1. The joint venture agreement between Philippine Heart Center (PHC) and Government Service Insurance System (GSIS) does not give rise to a separate taxable joint venture pursuant to Section 22(B) of the Tax Code of 1997. The contributions of PHC and GSIS to the joint venture is not a taxable event that will give rise to the payment of capital gains tax and creditable withholding tax, since contribution of land to the joint venture project is but a capital contribution to the said joint venture project, and therefore, no taxable event has taken place. Consequently, the capital contribution of land to the joint venture is not subject to capital gains tax, creditable withholding tax and VAT. 2. The allocation and distribution of their respective shares in the project consisting of forty percent (40%) areas or units for PHC and sixty percent (60%) areas or units for GSIS, in consideration of their respective contributions, as stipulated in the Memorandum of Agreement is not a taxable event and is not subject to income tax, withholding tax, VAT and documentary stamp tax because the allocation is a mere return of capital that each has contributed. The eventual transfer of title in the names of GSIS and PHC is but a mere formality, hence not a taxable event. The taxable event will arise when the co-venturers start selling their respective shares to third parties. DCIAST 3. Finally, in as much as the aforesaid joint venture project is not a taxable event and is not subject to documentary stamp but which has already been paid to and collected by the BIR pursuant to lifeblood theory, it is hereby most respectfully requested that the above stated amount of P2,687,192.55 documentary stamp tax payment be immediately refunded to PHC or be credited to it on the next taxable period. It is represented that PHC is the registered owner of two (2) parcels of land located at Marikina City with an aggregate area of 204,224 sq.m. and covered by Transfer Certificate of Title (TCT) No. 715341; that in 1983, PHC applied for a Seven Million Pesos (P7,000,000.00) financial assistance from GSIS, to finance the conversion of the above-mentioned properties into a housing project of its employees, however, prior to the release of money, PHC and GSIS agreed that PHC will convey subject properties to GSIS on the condition that the same will be converted into a housing project of its employees; that on December 18, 1983, PHC executed a Deed of Conveyance in favor of GSIS, wherein it ceded to the latter all of the former's rights and interests over said parcels of land, in consideration for which the GSIS shall reserve the subject properties for the purpose of developing a housing project for the exclusive benefit of the PHC personnel; that TCT N-84227 was subsequently issued by the Register of Deeds of Marikina City in the name of GSIS; that you likewise stated in your letter that PHC contributed the above-mentioned parcel of land, while the GSIS on the other hand, agreed to shoulder the expenses for the development and construction of housing projects and that the parties further agreed to allocate between themselves the areas or units therein in the following manner: Forty percent (40%) of the area or units shall be allocated to PHC, while the balance of Sixty Percent (60%) shall be allocated to GSIS; that for purposes of securing a new TCT under PHC's name over its forty (40%) percent portion of the properties covered by TCT N-84227, the GSIS issued a Certification dated April 25, 2000, in effect stating that GSIS is exempt from payment of taxes on all its properties; and that when the said certification was presented to BIR-Revenue District Office (RDO) No. 45, Marikina City, documentary stamp tax was nonetheless computed as due and the amount of P2,687,192.55, inclusive of penalties was paid by PHC. 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 PHC and GSIS is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. The co-venturers did not convey or transfer their ownership or interest over their parcels of land when they contributed their landholdings to the joint venture but merely pooled their resources to a common fund. These pooled resources are co-owned by the joint venture partners. The said contribution constituted PHC's and GSIS' capital contribution to the joint venture project, therefore, such contributions are not taxable event that will give rise to the payment of regular income tax/creditable withholding tax. The transfers are also not subject to VAT, since they are not in the course of business but capital contributions. 2. The allocation of saleable area of the project to PHC and GSIS in consideration of their respective contributions, as stipulated in the Deed of Partition are not taxable events and are not subject to income tax or any withholding tax because the allocations are mere returns of capital that each has contributed. The Deed of Partition whereby the co-venturers will allocate unto each other their shares 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, income tax and any withholding tax because the allocations are made without monetary consideration and are not in connection with a sale. The partition is made merely to segregate the saleable area 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. However, 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 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. 3. Section 185 of the Revised Documentary Stamp Tax Regulations (Regulations No. 26)provides that "conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable." Inasmuch as the aforesaid joint venture project is not a taxable event, the documentary stamp tax paid by PHC in the amount of P2,687,192.55 may be refunded or be credited on the tax payments of PHC, subject to the condition that you file in writing with the RDO where PHC is registered, a claim for credit or refund within two (2) years after the payment of the tax under Sec. 204(C) of the 1997 Tax Code and Sec. 2 of Revenue Delegation Authority Order No. 3-2002. However, the notarial acknowledgment to said Memorandum of Agreement is subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code of 1997. 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 will be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service