BIR Ruling [DA-215-02]

November 21, 2002 BIR RULING [DA-215-02] 22 (B), 27 (A), 196, 57 (B) DA-062-2002 Sta. Lucia Realty & Development, Inc . Ground Flr., State Financing Bldg. Ortigas Avenue, Mandaluyong City Attention: Atty. Miriam G. Daway Legal Counsel Gentlemen : This refers to your letter dated October 11, 2002 quoted as follows: "1. On March 18, 2001, Sta. Lucia Realty & Dev. Inc. (herein referred to as the Developer) entered into a Joint Venture Agreement with Realty Development Corporation (herein referred to as the Owner) for the development of its 90,600 sq.m. property located at Brgy., San Andres, Municipality of Cainta, Rizal, into a residential subdivision, and the parties agree on a sharing of 45-55 on the resultant subdivided lots in favor of the OWNER. . . . "2. The parties agreed under par. 9 of the said agreement, that upon approval of the subdivision plan, the Owner shall already convey unto the Developer, its corresponding share of the resultant subdivision lots, so that the share of the developer could already be registered in its name thru a Deed of Assignment; "3. Now, the properties of the owner, covered by TCT No. 658295, 658296, 658297, have been consolidated and an approved plan has been released from the Land Management Bureau; "We 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 Realty Development Corporation assigns unto Sta. Lucia Realty Dev., Inc. its corresponding 45% share on the resultant subdivision lots by virtue of the latter's compliance of its obligation under the joint ventures agreement, being the developer of the project? The lots subject for development are covered by TCT Nos. T-658295, 658296 and 658297. "2. What would be the taxes involved when the parties eventually sell their share of 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, 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 Realty Development Corporation and Sta. Lucia Realty and Development, Inc. is not subject to income tax under Section 27 of the Tax Code of 1997. The assignment by Realty Development Corporation to Sta. Lucia Realty and 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 Realty Development Corporation and Sta. Lucia Realty and Development, Inc. 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 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 ) 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, Realty Development 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 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