BIR Ruling [DA-271-04]

May 17, 2004 BIR RULING [DA-271-04] Section 22 (B) BIR Ruling No. DA237-99; DA140-00; & DA97-01 Managen Development Corporation Unit 105 G/F Amberland Plaza Julia Vargas Avenue, Ortigas Center Pasig City Attention: Ms. Generosa D. Manas Chief, Operating Officer Gentlemen : This refers to your letter dated April 26, 2004 requesting for an exemption from the payment of income tax on the physical transfer by Antonio D. Manas, Jr.,Maria Paz D. Manas and Amelia D. Manas Owners of their real property to the Managen Development Corporation for subsequent sale to third parties. Documents show that Antonio D. Manas, Jr.,Maria Paz D. Manas and Amelia D. Manas ("OWNERS"),all with postal address at 21 Mushroom, Valle Verde, Pasig City are the registered owners of ninety nine (99) parcels of land ("PROPERTY") covered by and more particularly described as lot nos. 1 to 99, in Transfer Certificates of Titles (TCT) Nos. 42858 to 42957 of the Register of Deeds of Dagupan City located at Dawel, District of Bonuan, Dagupan City; that Managen Development Corporation ("DEVELOPER") is a corporation duly organized and existing under and by virtue of the laws of the Philippines, with postal address at Unit 105 Amberland Plaza, Julia Vargas Ave.,Ortigas Center, Pasig City; that the OWNERS and DEVELOPER executed a Memorandum of Agreement ("MOA") on December 11, 2003 for the purpose of developing the "San Marino Place" ("PROJECT") consisting of the PROPERTY of the OWNERS into one (1) contiguous residential subdivision by the DEVELOPER for sale to third parties; and that the MOA provides for the following terms and conditions: 1. The OWNERS shall contribute the PROPERTY on which the PROJECT shall be built. 2. The DEVELOPER shall contribute and provide the amount necessary to pay for the total cost to be incurred in connection with or incidental to the development of the PROJECT, including, but not limited to, construction costs, professional fees, consultancy fees, administrative/general overhead expenses, license and permits fees and utility charges. 3. The DEVELOPER shall be responsible for the financing, planning, design, marketing, construction monitoring and supervision of all facets of works on the PROJECT in accordance with the final plans and specifications and within the time schedule approved by the Parties. 4. In consideration of their respective contributions to the PROJECT, the parties shall acquire the rights, title and interests in and to the lots in the PROJECT in accordance with the following allocation: (a) The OWNERS shall acquire 24% of the total saleable/rentable Lots within the PROJECT, distributed as follows: (i) Antonio Manas 8% (ii) Maria Paz Manas 8% (iii) Amelia Manas 8% (b) The DEVELOPER shall acquire 76% of the total saleable/rentable Lots within the PROJECT In reply, please be informed as follows: 1) Pursuant to Section 22(B) of the Tax Code of 1997, the term "corporation" shall include 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. Such being the case, the joint venture that will be formed as a result of the MOA by and between the Owners and Developer for the construction and development of the PROPERTY 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 corporate income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. Considering the foregoing, the joint venture of Antonio D. Manas, Jr., Maria Paz D. Manas and Amelia D. Manas; and Managen Development Corporation for the construction and development of the "San Marino Place" will not create a taxable joint venture within the meaning of Section 22(B), in relation to Section 27(A) of the Tax Code of 1997. However, the construction services rendered by Managen Development Corporation shall be subject to VAT. 2) The allocation of saleable area of the Project between the Owners and Developer in consideration of their respective contributions in the Project, as stipulated in the MOA, and the issuance of the corresponding Transfer Certificate of Title by the Register of Deeds of Dagupan City to the co-venturers representing their respective shares or participating interests in the Project as stipulated in the MOA does not likewise give rise to a taxable event since the allocation is a mere return of capital that each has contributed and partakes the nature of a dissolution of co-ownership over real property which is merely identifying that portion of the developed property and which pertains to each of the co-venturers. The eventual transfer of Title in their name is but a mere formality of such dissolution, hence, not a taxable event. The same is therefore, not subject to income, withholding, value-added and documentary stamp taxes. Nonetheless, the acknowledgment to the Deed is subject to documentary stamp tax under Section 188 of the Tax Code of 1997. 3) It is only upon the subsequent sale or disposition by the co-venturers of the areas allocated to them that the gain that may be realized by them from such sale will be subject to the regular 32% income tax under Section 27(A) of the Tax Code of 1997, the creditable withholding tax under Revenue Regulations No. 2-98, as amended and the value-added tax under Section 106 of the Tax Code of 1997. Furthermore, the sale shall likewise be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 based on the consideration or the fair market value of the property being transferred, whichever is higher. 4) Section 185 of the Revised Documentary Stamp Tax (DST) Regulations No. 26 provides that "conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable." Accordingly, the Partition Agreement whereby the Owners and Managen Development Corporation 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, income, withholding and value-added taxes because the allocation is made without monetary consideration and is not in connection with a sale. The partition is made merely to segregate the saleable area between the parties, as the return of the capital which each contributed. However, the acknowledgment to said Deed of Conveyance and Deed of Partition are subject to DST of P15.00 pursuant to Section 188 of the Tax Code of 1997. 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 ( BIR Ruling No. DA-237-99 dated May 31, 1999; DA-140-2000 dated March 8, 2000; and DA-097-01 dated May 28, 2001 ). Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service