BIR Ruling [DA-262-00]

June 19, 2000 BIR RULING [DA-262-00] 22 (B); 27 (A); 196; 010-96 DA-212-04-07-99 Seashore Realty and Development Corporation 211 Rizal St., Calamba Laguna Attention: Mr. Rodolfo L. Pua Gentlemen : This refers to your letter dated January 12, 2000 requesting confirmation of your opinion to the effect that the (a) Joint Venture for the development and construction of a residential subdivision between Virginia Uichanco and Seashore Realty Development Corp. (SRDC) will 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 and (b) the allocation between the parties of the developed lots as their participating interest in the project 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. It is represented that Virginia Uichanco is a registered owner of three (3) parcels of land situated in Brgy. Dila, Bay, Laguna, covered by and more particularly described in Transfer Certificate of Title Numbers T-49737, T-49738 and T-27937 of the Registry of Deeds of Laguna with an aggregate area of 82,416 sq.m.; that on February 18, 1993, Virginia Uichanco and Seashore Realty and Development Corporation, a corporation duly organized and existing under Philippine laws, entered into a Joint Venture Agreement for the construction and development of these three (3) parcels of land into a residential subdivision, under the following conditions: 1. Virginia Uichanco shall contribute the said three (3) parcels of land to the project. 2. Seashore Realty and Development Corporation (SRDC) shall contribute the cash needed for the development of the project, covering expenses such as: a) Survey, consolidation and subdivision of the land into residential lots; b) Construction and development of the subdivisions facilities and improvements such as road, drainage, electrical and water supply; c) Securing the necessary permits and licenses from all government agencies and offices concerned. 3. In consideration of, and in return for their respective contribution to the project, the parties shall receive, share and be allocated Net Salable Lots in the following proportion: a) Virginia Uichanco - Forty percent (40%) b) Seashore Realty & Devt Corp. - Sixty percent (60%) 4. The parties shall agree on the lots to be respectively allocated to them through Deed of Partition without any monetary consideration per phase. 5. Road lots, open space and other improvements and facilities shall be turned over and donated in due time to the Municipal Government and/or Homeowners Association as the case may be. 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), association or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction project or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. Considering the foregoing, we hereby confirm your opinion that the Joint Venture Agreement executed by Virginia Uichanco and SRDC for the construction and development of the subdivision facilities and improvements and the allocation of their respective Participating Interests in the project will not create a separate taxable entity within the meaning of Section 22(B), in relation to Section 27(A), of the Tax Code of 1997 and that the allocation between and among the parties of the developed lots as their participating interest in the project, as stipulated in the Joint Venture Agreement, is not a taxable event and is not subject to income/expanded withholding tax. (BIR Ruling No. 010-96 dated January 23, 1996). Neither will the allocation and distribution of their respective shares in the project be subject to the value-added tax under Section 106 of the Code because the allocation is not a sale but mere return of capital that each of the parties has contributed. Moreover, Section 185 of the Revised Documentary Stamp Tax (DST) Regulations (Regulations No. 26) provides that "conveyance of realty not in connection with a sale, to trustees or other persons without consideration are not taxable". Accordingly, since the Joint Venture Agreements and the Deeds of Partition allocating and conveying the developed properties in favor of the co-venturers are without consideration and are not in connection with a sale, no DST under Section 196 of the Code is payable and collectible. However, the acknowledgment to said instrument is subject to DST to P15.00 pursuant to Section 188 of the Tax Code. (BIR Ruling DA-065-97) It should be understood, however, that when the parties subsequently sell or dispose of the developed lots which they received or will receive as their respective shares or Participating Interests in the project to third parties, the gain that may be realized by the con-venturers from such sale will be subject to the regular rate of corporate income tax under Section 27 of the Tax Code of 1997, or to the tax imposed under Section 24(c) of the same Code, in the case of individual owners, and to the creditable/expanded withholding tax. (BIR Rulings DA-212-04-07-99; DA-187-3-25-99; DA-265-5-5-99). The Deeds of Sale or Conveyances of the subject real properties, shall, however, be subject to DST based on the consideration contracted to be paid for such realty or on its fair market value, whichever is higher pursuant to Section 196 of the Tax Code of 1997. Furthermore, the sale of the developed lots shall also be subject to VAT under Sec. 106(A)(1) of the same Code. 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.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group