BIR Ruling [DA-273-03]

August 20, 2003 BIR RULING [DA-273-03] 22 (B), 98 (B) DA-096-2000 MRO Development Corporation #21 Paseo Annabelle, Maria Luisa Estate Park Banilad, Cebu City Attention: Annabelle O. Aboitiz General Manager Gentlemen : This refers to your letter dated April 9, 2003. It can be gleaned from said letter and the documents attached thereto that it is a request for the issuance of ruling to the effect that the joint venture agreement between MRO Development Corporation (MRO Corporation) and ADA Realty Development Corporation (ADA Realty) for the development of the Maria Luisa Estate Park Subdivision Phase XI (Maria Luisa Subdivision Phase XI) is not a taxable joint venture. The "Development Contract" dated March 25, 1996 shows that ADA Realty and MRO Corporation entered into a contract for the development of Maria Luisa Subdivision Phase XI. In the said contrast, ADA Realty ceded unto MRO Corporation that parcel of land covered by Transfer Certificate of Title No. 107392, with an area of 28,900 square meters for development into the Maria Luisa Subdivision Phase XI. MRO Corporation agreed to give road right of way to the Maria Luisa Phase XI. In consideration of the foregoing prestations, the parties agreed to divide between them the subdivision lots pursuant to their "Division of Property Agreement" dated July 21, 2001. In reply, please be informed that in BIR Ruling No. DA-096-2000, this Office ruled that a joint venture entered into for the purpose of undertaking construction projects is not subject to corporate income tax imposed under Section 27(A) of the Tax Code of 1997. 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 of the Republic of the Philippines. Presidential Decree No. 929 amended the definition of the taxable corporation as not to include a joint venture formed for the purpose of undertaking construction projects. The reasons for such amendment are as follows: (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. EAcCHI 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 is of the opinion as it hereby holds that the joint venture entered into by and between ADA Realty and MRO Corporation is of subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. ADA Realty did not convey or transfer its ownership or interest over the parcel of land when it contributed the aforesaid landholding to the joint venture but merely pooled said resources to a common fund. The pooled resources are co-owned by the joint venture partners. The said contribution constituted its capital contribution to the joint venture project, therefore, such contribution is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax. The transfer is also not subject to value-added tax since the transfer is not in the course of business but a capital contribution. The allocation of saleable area of the project in consideration of their respective contributions as stipulated in the "Division of Property Agreement" is not a taxable event and is not subject to income tax or any withholding tax because the allocation is a mere return of capital that each has contributed. However, 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 regular income tax rate under Section 27(A) of the Tax Code of 1997, and to the creditable withholding tax under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001. Moreover, said 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 value-added tax. The "Division of Property Agreement" whereby ADA Realty and MRO Corporation allocated 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 tax and any withholding tax 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 Partition Agreement is subject to the documentary stamp tax 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 will be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service