BIR Ruling [DA-257-04]

May 17, 2004 BIR RULING [DA-257-04] Mendalla Realty and Construction Corporation 0585 Quirino Avenue San Dionisio Paraaque City Attention: Mr. Ismael M. Allangue President Gentlemen : This refers to your letter dated May 3, 2004 stating that Mendalla Realty and Construction Corporation (MRCC),is a corporation duly registered under the laws of the Philippines with office address at 0585 Quirino Avenue, San Dionisio, Paraaque City; that on the other hand, Angelita, George, Bienvenida and Prudencio all surnamed Lim (Landowners) are the absolute and registered owners of four (4) parcels of land located in Paraaque City respectively covered by TCT Nos. 38023, 38022, 38024 and 38025 issued by. the Registry of Deeds for Paraaque City with an aggregate area of 7,523 square meters; that on August 26, 2003 a Memorandum of Agreement was entered into by MRCC with the Landowners to develop the said land into residential housing project; and that the salient feature of the MOA is that "Upon completion of the subdivision works/infrastructures and improvements to the satisfaction of the Owners and Developer the saleable lots shall be allotted and divided to the following, to wit: Owners 3,000 square meters, Developer 2,909 square meters, to the Spouses Pablo V. Balatero, Jr. and Norma Padilla Balatero, 230 square meters as agents' commission, in accordance with the subdivision plan duly approved by the parties herein and made an integral part hereof." Based on the foregoing representations, you now request for ruling regarding the following "1. Exemption of the Joint Venture from income tax under Section 27, in relation to Section 22(B) of the Tax Code of 1997; "2. Exemption of the assignment by Angelita, George, Bienvenida and Prudencio, all surnamed Lim of their realties to MRCC from corporate income tax/creditable withholding tax and capital gains tax, its being merely a transaction to effect its capital contribution to the joint venture and not taxable event; "3. Exemption of the Partition Agreement between MRCC and Angelita, George, Bienvenida and Prudencio, all surnamed Lim, whereby the parties agreed to allocate to each other their aliquot shares of 50% as agreed upon, in consideration of the capital contribution, from documentary stamp tax imposed under Section 196 or 176 of the Tax Code of 1997. The allocation is neither with monetary consideration nor in connection with sale. This is merely to segregate the saleable areas between the two parties, as a return of their capital contribution in the joint venture; and "4. Exemption of the transfer of the saleable area to MRCC and Angelita, George, Bienvenida and Prudencio Lim pursuant to the dictates of the immediately preceding paragraph, from value-added tax (VAT) under Section 105 of the Tax Code of 1997. The said transfer is neither a sale, barter, exchange of goods, property nor service rendered that is subject to VAT." In reply thereto, please be informed as follows: 1. Section 22(B) of the Tax Code of 1997 provides that 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. It is to be emphasized, however, that P.D. 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 holds that the Joint Development Agreements entered into by and between MRCC and Angelita, Bienvenida, George and Prudencio, all surnamed Lim is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997. However, the co-venturers are separately subject to the regular income tax on their taxable income during each taxable year respectively derived by their from the aforesaid construction project. 2. The allocation and distribution by the Landowners of their respective properties in the project in consideration for their respective contributions to the said agreement is not a taxable event and is not subject to income tax, withholding tax, value-added tax and documentary stamp tax because the allocation is a mere return of capital that each has contributed. ( BIR Ruling Nos. 10-96 dated January 23, 1996; DA065-97 dated February 10, 1997; DA286-98 dated June 29, 1998 ) 3. The Deed of Partition to be executed by the parties in respect of each phase of the project whereby they will allocate and distribute among them their respective shares in the project, in exchange for their respective contributions, being without monetary consideration is not subject to value-added tax, income/creditable and documentary stamp taxes respectively imposed under Sections 106, 24(c), 27(A) as implemented by Revenue Regulations No. 2-98, as amended and 196 all of the Tax Code of 1997. ( BIR Ruling Nos. 207-92 dated July 16, 1992; 349-93 dated July 30, 1993; DA Ruling No. 025-95 dated January 11, 1995 ) 4. 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 and 108 of the same Tax Code. Hence, by contributing the properties, MRCC, neither sells, barters, exchanges goods, property nor renders services to be subject to VAT. ( BIR Ruling Nos. DA240-2001 dated November 16, 2001; DA115-2001 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 No. 2-98, as amended by Revenue Regulations 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, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service