BIR Ruling [DA-274-03]

August 21, 2003 BIR RULING [DA-274-03] 22 (B) DA 286-98 E.L. Punsalan and Associates G-104 Medical Plaza Makati Amorsolo corner Dela Rosa Street Legaspi Village Makati City Attention: Atty. Eranio L. Punsalan Gentlemen : This refers to your letter dated August 11, 2003 stating that your client, Mendalla Realty and Construction Corporation (MRCC), is a corporation duly registered under the laws of the Philippines with principal office address at 579 Quirino Avenue, Paraaque City; that MRCC entered into a Joint Venture Agreement with Sunvar Realty Development Corporation (SRDC), a domestic corporation with office address at 2nd Floor, Sunvar Plaza, Amorsolo Street, corner Pasay Road, Makati City, for the development of SRDC's parcel of land covered by TCT No. 75377 into a residential subdivision lots; that while, SRDC contributes to the Joint Venture its parcel of land, MRCC undertakes to do all acts requisites to developing it into a residential subdivision, such as but not limited to: lots, concrete roads, curbs, gutters, drainage system, centralized waterworks system, electrical connection facilities and other subdivision facilities pursuant to the duly approved subdivision plan; and that upon the completion of the work by MRCC, to the satisfaction of SRDC, the latter commits to convey, assign and transfer ownership to the former, one half (1/2) or fifty percent (50%) of the total saleable area in the subdivision. Based on the foregoing representations, you now request a ruling on the following: 1. Exemption of the Joint Venture from income tax under Section 27, in relation to Section 22(B) of the National Internal Revenue Code of 1997 and the relevant provisions of Presidential Decree No. 29; 2. Exemption of the assignment by SRDC of its realty to MRCC from corporate income tax/creditable withholding tax and capital gains tax, it being merely a transaction to effect its capital contribution to the joint venture and not a taxable event; 3. Exemption of the Partition Agreement between MRCC and SRDC, whereby the parties agreed to allocate to each other their aliquot share of 50%, as agreed upon, in consideration of their capital contribution, from documentary stamp tax imposed under Section 196 or 176 of the NIRC, as the case may be. The allocation is neither with monetary consideration nor in connection with a sale. This is merely to segregate the saleable areas between the two parties, as a return of their capital contribution in the joint venture; 4. Exemption of the transfer of the saleable areas to MRCC and SRDC, pursuant to the dictates of the immediately preceding paragraph, from value-added tax (VAT) under Section 105 of the NIRC. The said transfer is neither a sale, barter, exchange of goods, property nor services rendered that is subject to VAT. In reply thereto, please be informed as follows: (1) Section 22(B) of the Tax Code of 1997, 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 excluded joint venture formed for the purpose of undertaking construction projects from the definition of the term "Corporation" because (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. 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 Agreement entered into by the SRDC and MRCC, as Developer, for the development and subdivision of the aforesaid property into a residential subdivision is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997. (2) The assignment of the property by SRDC, as the Owner, to the MRCC, as the Developer, pursuant to their JVA is not subject to the capital gains tax and to the documentary stamp tax under Sections 24(D)(1) and 196 of the Tax Code of 1997. However, the certification is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the said Code. However, the co-venturers are separately subject to the regular individual and corporate income taxes on their respective taxable income during each taxable year derived by them from the aforesaid construction project. Moreover, the Joint Development Agreement entered into by and between the Owner and Developer is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the Tax Code of 1997. However, the sale of the said real property shall be subject to the documentary stamp tax under Section 196 of the said Code. (3) The allocation and distribution of their respective shares in the project by virtue of the Partition Agreement, consisting of developed lots and the housing structures built thereon in consideration of their respective contributions, as stipulated in the Joint Venture 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) (4) Finally, the transfer of the saleable areas to MRCC and SRDC by virtue of the Partition Agreement, i.e. , by allocating and distributing between their respective shares in the project in exchange for their respective contributions is without monetary consideration but merely acknowledges and confirms the title and ownership of the above-named Owner and the Developer, the same is not subject to the value-added tax, income/creditable withholding tax nor to the documentary stamp tax 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. However, the sale of the respective share of the Owners and/or the Developer of the aforesaid property shall be subject to the creditable withholding tax, VAT and documentary stamp tax pursuant to Revenue Regulations No. 2-98, as amended, Sections 106(A) and 196 of the Tax Code of 1997. IN VIEW OF THE FOREGOING, this will authorize the Revenue District Officer (RDO) of the revenue district where the property is located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the transfer of the titles to the lots to be received by the above-named Owner and Developer based on their respective allocations pursuant to the partition without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax and value-added tax. 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