BIR Ruling [DA-214-02]

November 21, 2002 BIR RULING [DA-214-02] 22 (B), 27 (A), 196, 57 (B) DA-096-2000 Ayala Land, Inc. Tower One, Ayala Triangle Ayala Avenue, Makati City Attention: Atty. Sheila Marie L. Uriarte-Tan Senior Division Manager Legal Division Gentlemen : This refers to your letter dated November 13, 2002 quoted as follows: "We respectfully request confirmation of our opinion that (1) the joint development of a condominium project by Ayala Land, Inc. ( "ALI" ) and Community Innovations, Inc. ( "CII" ) will not create a taxable joint venture within the meaning of Section 22(B) in relation to Section 27(A) of the National Internal Revenue Code of 1997 (the "Tax Code"), and (2) the allocation of their respective interests in the project, and the execution of the Deed of Partition to implement such allocation, is not a taxable event and is not subject to income/expanded withholding tax, value-added tax, and documentary stamp tax under Section 196 of the Tax Code. "Background "ALI is a corporation duly organized and existing under Philippine laws and is the registered owner of certain parcels of land at the corner of Ayala Avenue and Sen. Gil J. Puyat Avenue, Makati City, more particularly identified as the parcel of land described under Transfer Certificate of Title No. 218347 (the "Parcel" ). CII is a corporation duly organized and existing under Philippine laws and is engaged in the development of real estate. "On September 24, 2002, ALI and CII (collectively, the "Parties" ) entered into a Joint Development Agreement (the "Agreement" ) for the joint development of the Parcel into a condominium project which the parties have agreed to call "The Columns Ayala Avenue" (the "Project" ). The Project includes the planning, construction and development of the Parcel together with condominium buildings and improvements in phases (each being a "Phase" ) and the marketing and sale of the condominium units therein (a "Condominium Unit" ). The specific terms of the Agreement are as follows: "(a) ALI shall contribute the Parcel (and all its rights, title and interest in and to the same) that will constitute the entire area of the Project. "(b) CII shall contribute the necessary cash for the construction and development of the Project and perform all the development work for the Project. "(c) In consideration of, and in return for, their respective contributions to the Project, ALI and CII shall share in the distribution of the Condominium Units in each building (the "Building" ) constituting part of the Project proportionate to their respective contributions. Thus: "(1) to ALI shall be allocated and ALI shall receive such number of Condominium Units in each Building with an aggregate Reference Value (defined as the Peso value to be assigned to a Condominium Unit determined by CII to be the most suitable for such Condominium Unit, equal to the gross selling price that a buyer will be required to pay if he was to purchase such Condominium Unit on a deferred payment basis) not exceeding the amount computed as follows ( "ALI's Allocation" ): "RV ALI = 17.11% (R MO MP A) "where: "RV ALI = the Reference Value of ALI's Allocation; "R = the total Reference Value of all Condominium Units in the Building; "MO = an amount representing the agreed estimated marketing expenses for the sale and/or lease of the Condominium Units in the Building "MP = an amount representing the agreed estimated maintenance expenses for the Building which will be incurred prior to the conveyance of the Common Areas therein to the Association "A = an amount representing the agreed estimated advertising and promotions expenses for the sale and/or lease of the Condominium Units in the Building "(2) to CII shall be allocated and CII shall receive such number of Condominium Units with an aggregate Reference Value equal to the difference between the aggregate Reference Value of all Condominium Units in the Project and the Aggregate Reference Value of ALI's Allocation ( "CII's Allocation" ). "(d) For the purpose of distributing the respective Allocations of the parties for each Phase of the Project, the parties shall choose from among the Condominium Units in such phase the highest number of Condominium Units with an aggregate Reference Value which shall equal to but not exceed their respective Allocations. Thus, ALI shall have the right to choose one (1) Condominium Unit from all Condominium Units in said Phase of the Project; thereafter, CII shall have the right to choose four (4) Condominium Units from the balance of the Condominium Units. This alternating cycle shall be repeated until ALI shall have chosen such whole number of Condominium Units with an aggregate Reference Value which is equal to or nearly equal but not more than its Allocation for the relevant Phase. In the event that ALI shall have been allocated such number of Condominium Units with an aggregate Reference Value which is less than its Allocation for the relevant Phase, thereby resulting in a deficiency in its Allocation (an "Allocation deficiency" ), ALI shall have the option, exercisable on the date of selection, to choose an additional Condominium Unit (the "additional Condominium Unit" ) to form part of its Allocation and shall pay to CII in cash the difference between the Reference Value of the additional Condominium Unit and the Allocation deficiency, such payment to be made by ALI to CII not later than thirty (30) days from the date at which ALI shall have first sold to a third party purchaser a Condominium Unit constituting part of ALI's Allocation in the relevant Phase of the Project. In the event that ALI chooses not to exercise its aforesaid option, the difference, if any, between ALI's Allocation for the Phase and the aggregate Reference Value of its allocated Condominium Units shall be paid by CII to ALI in cash not later than thirty (30) days from the date at which CII shall have first sold to a third party purchaser a Condominium Unit constituting part of CII's Allocation in the relevant Phase of the Project. "(e) In accordance with the provisions of Presidential Decree No. 957, Republic Act No. 4726 and the rules and regulations implementing the same, the Common Areas in a Building shall be ceded to and registered in the name of the Condominium Corporation upon Completion of the particular Phase to which the Building pertains, and the Parcel shall be conveyed to and registered in the name of the Condominium Corporation upon Completion of the Project; provided that, prior to the conveyance and registration of the Parcel in the name of the Condominium Corporation, possession of that portion of the Parcel pertaining to a completed Phase shall be conveyed to the Condominium Corporation for the use of the owners and residents of the Condominium Units of the completed Phase; provided further that, upon conveyance of possession of that portion of the Parcel pertaining to a completed Phase, the Condominium Corporation shall be responsible for the payment of the real property taxes on said portion of the Parcel and the administration and management thereof. "(f) For the purpose of effecting the distribution of their respective allocated Condominium Units for each Phase of the Project, the parties shall execute a deed of partition without monetary consideration. After distribution, the Parties shall maintain separate ownership of their allocated Condominium Units and may sell or transfer their respective Condominium Units to third parties." In view of the foregoing, you now request for confirmation of your opinion that: 1. The joint venture whereby ALI will contribute the Parcel and CII will contribute the cash for the development of the Project does not give rise to a taxable joint venture, hence, is not subject to corporate income tax pursuant to Section 22 (B), in relation to Section 27 (A) of the Tax Code of 1997. 2. The allocation and distribution of the respective shares of the Parties in the Project consisting of Condominium Units in consideration for their respective contributions to the joint venture is not a taxable event, hence, is not subject to the regular corporate income tax under Section 27(A) of the Tax Code, nor creditable withholding tax under Revenue Regulation No. 2-98, nor the value-added tax under Section 106 of the Tax Code, because the allocation is a mere return of capital that each of the Parties has contributed to the Project. 3. The Deed of Partition to be executed by the Parties whereby they allocate and distribute between them their respective shares in the Project in exchange for their respective contributions is without monetary consideration, hence, is not subject to value-added tax under Section 106 of the Tax Code, income/creditable withholding tax under Revenue Regulations No. 2-98, and the documentary stamp tax under Section 196 of the Tax Code. 4. In accordance with the provisions of Presidential Decree No. 957, Republic Act No. 4726 and the rules and regulations implementing the same, the conveyance by ALI and the registration of the Parcel in the name of the Condominium Corporation upon completion of the Project is not a taxable event and not subject to corporate income tax, VAT or documentary stamp tax. Consequently, the confirmation of this request will authorize the Revenue District Officer (RDO) of the revenue district where the Parcel is located to issue the corresponding Tax Clearance Certificate with regard to the transfer of the title to the Property in the name of the Condominium Corporation upon completion of the Project without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax, and value-added tax. 5. In the event, however, that any of the Parties shall subsequently sell their respective shares consisting of the Condominium Units, such sale shall be subject to the regular corporate income tax under Section 27(A) of the Tax Code and the creditable withholding tax under Revenue Regulations No. 2-98, value-added tax imposed under Section 106, and documentary stamp tax imposed under Section 196, both of the Tax Code. 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 ALI and CII is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. 2. The allocation and distribution of the Condominium Units between ALI and CII in consideration of their respective contributions is not a taxable event and is not subject to income tax or any withholding tax because the allocation is a mere return of capital that each has contributed. ALI did not convey or transfer its ownership or interest over its parcel of land when it contributed the aforesaid landholding to the joint venture. The said contribution constituted ALI's capital contribution to the joint venture project, therefore, such contribution is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax. The transfer is also not subject to VAT, since the transfer is not in the course of business but a capital contribution. 3. The Deed of Partition whereby ALI and CII will allocate unto each other their share in the Condominium Units in consideration of their respective contributions is 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 allocation is made without monetary consideration and is not in connection with a sale. The partition is made merely to segregate the Condominium Units 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. 4. The conveyance by ALI and the registration of the Parcel and the common areas in the name of the Condominium Corporation upon completion of the Project and the corresponding Deeds of Conveyance that will be executed are not subject to capital gains tax, withholding tax and documentary stamp tax since said transfer is still without consideration and not in connection with a sale made to the condominium corporation, the purpose thereof being limited to the management of the Project for the common benefit of the unit owners. This will authorize the Revenue District Officer (RDO) of the revenue district where the Parcels are located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the transfer of title to the Property in the name of the Condominium Corporation upon completion of the Project, without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax and value-added tax. 5. The gain that may be realized by the Parties upon subsequent disposition of the Condominium Units allocated to them 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. 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 will be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service