BIR Ruling [DA-213-05]

May 3, 2005 BIR RULING [DA-213-05] Section 22 (B); DA-192-2001 Anna Celestina R. Cruz 3-C Maliksi St.,Piahan Quezon City M a d a m : This refers to your letter dated April 21, 2005 stating that: 1. Sometime on July 3, 2003, G.P. HOMES, INC. (the Owners) entered into a Joint Venture Agreement with Sta. Lucia Realty and Development, Inc. (the Developer) for the development of their 357,038 sq.m. property covered by Transfer Certificates of Title (TCT) No. T-46953, O-7337, and O-7335 located at Bo. Cabituagan, Mp. of Subic, Province of Zambales, into a residential estate with a lot sharing of 47.5-52.5 percent for the resultant lots of the subdivision; In accordance with the joint venture agreement, the Developer has caused the development of the property and the project is now in the process of segregation and transfer of the corresponding share of the Developer in the resultant titles representing its 52.5% share of the project; and a Sharing Scheme was already executed to transfer the 52.5% [from G.P. HOMES, INC.] share of the Developer in the resultant subdivision lots. 2. Sometime on December 6, 1996, Cesar S. Arnaldo (the Owner) entered into a Joint Venture Agreement with Sta. Lucia Realty and Development, Inc. (the Developer) for the development of their 361,408 sq.m. property covered by Original Certificates of Title (OCT) No. P-6323, P-5931, P-5645, TCT No. 35986, P-8426, and P-8427 and that stated in the Supplemental Agreement dated September 21, 2004 for the development of TCT No. T-51764 with an area of 29,999.50 square meters, all located at Bo. Cabituagan, Mp. of Subic, Province of Zambales, into a residential estate within a golf course with a lot sharing of 40-60 percent for the resultant lots of the subdivision; In accordance with the joint venture agreement, the Developer has caused the development of the property and the project is now in the process of segregation and transfer of the corresponding share of the Developer in the resultant titles representing its 60% share of the project; and a Sharing Scheme was already executed to transfer the 60% [from Cesar S. Arnaldo] share of the Developer in the resultant subdivision lots. TSEcAD 3. Sometime on December 19, 1996, Eloisa Solis Catihanan (the Owner) entered into a Joint Venture Agreement with Sta. Lucia Realty and Development, Inc. (the Developer) for the development of their 77,831 sq.m. property covered by Transfer Certificates of Title (TCT) No. T-46904 (Lot 1),T-46907 (Lot 4),T-46906 (Lot 3) and T-46909 (Lot 6) located at Bo. Cabituagan, Mp. of Subic, Province of Zambales, into a residential estate within a golf course with a lot sharing of 40-60 percent for the resultant lots of the subdivision; In accordance with the joint venture agreement, the Developer has caused the development of the property and the project is now in the process of segregation and transfer of the corresponding share of the Developer in the resultant titles representing its 60% share of the project; and a Sharing Scheme was already executed to transfer the 60% [from Eloisa Solis Catihanan] share of the Developer in the resultant subdivision lots. 4. Sometime on November 14, 1996, GUARANTEED HOMES, INC. (the Owners) entered into a Joint Venture Agreement with Sta. Lucia Realty and Development, Inc. (the Developer) for the development of their 1,132,551 sq.m. property covered by Transfer Certificates of Title (TCT) No. 10864, 10862, 31049, OCT No. 1381, 10863, 11391, 10861, 10920, and 10463 located at Bo. Cabituagan, Mp. of Subic, Province of Zambales, into an 18-hole golf course and beach resort within a residential estate with a lot sharing of 40-60 percent for the resultant lots of the subdivision; In accordance with the joint venture agreement, the Developer has caused the development of the property and the project is now in the process of segregation and transfer of the corresponding share of the Developer in the resultant titles representing its 60% share of the project; and a Sharing Scheme was already executed to transfer the 60% [from GUARANTEED HOMES, INC.] share of the Developer in the resultant subdivision lots. 5. Sometime on March 18, 2004, SPENCER REALTY DEVELOPMENT CORPORATION (the Owners) entered into a Joint Venture Agreement with Sta. Lucia Realty and Development, Inc. (the Developer) for the development of their 229,776 sq.m. property covered by Transfer Certificate of Title (TCT) No. 49028 (under the name of Sps. Paterno A. Magsaysay and Dolores Fabie) located at Bo. Cabangan, Mp. Of Subic, Province of Zambales, into a residential estate with a lot sharing of 42-58 percent for the resultant lots of the subdivision; In accordance with the joint venture agreement, the Developer has caused the development of the property and the project is now in the process of segregation and transfer of the corresponding share of the Developer in the resultant titles representing its 58% share of the project; and a Sharing Scheme was already executed to transfer the 58% [from SPENCER REALTY DEVELOPMENT CORPORATION] share of the Developer in the resultant subdivision lots. 6. Sometime on July 7, 2004, Lirio G. Gutierrez (the Owner) entered into a Joint Venture Agreement with Sta. Lucia Realty and Development, Inc. (the. Developer) for the development of their 40,380 sq.m. property covered by Original Certificate of Title (TCT) No. P-6414 located at Cawag, Subic, Province of Zambales, into a residential estate with a lot sharing of 40-60 percent for the resultant lots of the subdivision; In accordance with the joint venture agreement, the Developer has caused the development of the property and the project is now, in the process of segregation and transfer of the corresponding share of the Developer in the resultant titles representing its 60% share of the project; and a Sharing Scheme was already executed to transfer the 60% [from Lirio G. Gutierrez] share of the Developer in the resultant subdivision lots. 7. Sometime on January 21, 1998, Elvira Juico, et al. (the Owners) entered into a Joint Venture Agreement with Sta. Lucia Realty and Development, Inc. (the Developer) for the development of their 239,997 sq.m. property covered by Transfer Certificate of Title (TCT) No. T-47477 where the subject of the joint venture agreement covers 89,998.50 square meters only located at Bo. Cabitaogan, Mp. of Subic, Province of Zambales, into a residential estate with a lot sharing of 40-60 percent for the resultant lots of the subdivision; In accordance with the joint venture agreement the Developer has caused the development of the property and the project is now in the process of segregation and transfer of the corresponding share of the Developer in the resultant titles representing its 60% share of the project; and a Sharing Scheme was already executed to transfer the 60% [from Elvira Juico, et al.] share of the Developer in the resultant subdivision lots. that you now request for an opinion on the tax consequences of the following transaction: 1. What would be the taxes involved when the Owners transfer to the Developer its percentage share of total saleable lots and club shares for its development of the project? 2. What would be the taxes involved when the parties eventually sell their respective share of saleable lots and club shares to third party? 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. 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 the Owners to the Developer 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 Sharing Scheme whereby the Owners 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 acknowledgement to said Sharing Scheme 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, the Owners, neither sell, barter, exchange goods, properties nor render service 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 or capital gains tax under Section 24(D)(1), as the case may be, 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. SDAcaT 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group