BIR Ruling [DA-227-04]

April 29, 2004 BIR RULING [DA-227-04] 22 (B) DA-192-2001 Durawood Construction and Lumber Supply, Inc . Durawood Building 117 Sumulong Highway cor. B. Soliven Avenue Bo. Mayamot, Antipolo City Attention: Ms . Ma . Lourdes F. Villarama Chief Accountant Gentlemen : This refers to your letter dated January 15, 2004 stating that Durawood Construction & Lumber Supply, Inc. (DCLSI) and Homeowners Development Corporation (HDC) are corporations duly organized and existing under Philippine laws and are engaged in the development of real estate. On October 12, 1994, DCLSI and HDC (collectively, the "Parties") executed a Joint Venture Agreement (the "Agreement") to jointly buy and develop three (3) parcels of land (the "Project") from Westmont Bank. The project consists of the planning, construction and development of the parcels of land into a residential subdivision and the marketing and sale of developed lots located therein (saleable developed lots being referred to as "Developed Lots"). The specific terms of the Agreement are as follows: 1. DCLSI and HDC agreed that HDC would be the registered owner of the said parcels of land for bank loan purposes intended for the acquisition of the parcel of land. 2 Down payment and bank loan amortization for the acquisition of the parcels of land shall be paid on a 50-50 basis by DCLSI and HDC. 3. All expenses relative to the development of the project shall be shared equally by DCLSI and HDC. You now request for a confirmation of your opinion that: 1. The Joint Venture whereby DCLSI and HDC contributed for the acquisition of the property, which was developed as a residential subdivision 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. 2. The allocation and distribution of their respective shares in the project consisting of Developed Lots 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, creditable withholding tax under Revenue Regulations No. 2-98, as amended and value-added tax under Section 106 of the 1997 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 DCLSI and HDC whereby they allocate and distribute among them their respective shares in each phase of 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 of 1997, income/creditable withholding tax under Revenue Regulation No. 2-98, as amended, and the documentary stamp tax under Section 196 of the same Tax Code. cACHSE 4. The confirmation of your request will authorize the Revenue District Office (RDO) of the revenue district where the parcels of land are located to issue the corresponding Tax Clearance Certificate with regard to the transfer of the Developed Lots to DCLSI based on their respective allocations without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax and value-added tax. In reply, please be informed that: 1. 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 intent on 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 HDC and DCLSI is not subject to income tax under Section 27 of the Tax Code of 1997. 2. The assignment by HDC to DCLSI 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 ) 3. The Deed of Partition whereby HDC and DCLSI will allocate unto each other their share in the resultant subdivision lots, 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 resultant lots between the parties, as the return of the capital which each has contributed. However, the acknowledgement to said Deed of Partition 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 the transfer is not in the course of business but a capital contribution. 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 will authorize the Revenue District Officer (RDO) of the revenue district where the properties are located to issue the corresponding Tax Clearance Certificate with regard to the transfer of the developed lots to DCLSI based on its allocation without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax and value-added tax. DEICaA 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service