BIR Ruling [DA-277-03]

August 21, 2003 BIR RULING [DA-277-03] 22 (B), 27 (A), 196, 57 (B) DA-096-2000 Agro-Macro Development Corporation 21 Paseo Annabelle, Ma. Luisa Estate Park Banilad, Cebu City Attention: Ms. Annabelle O. Aboitiz General Manager Gentlemen : This refers to your letter dated November 18, 2002, as indorsed by Mr. Jaime B. Santiago, Regional Director, Revenue Region No. 13, Cebu City, requesting for tax exemption, relative to the Development Contract (later on modified by an Amendment to Development Contract) executed by and between the Heirs of Damaso Leyson (Landowner) and Agro-Macro Development Corporation (Developer); that the pertinent provisions of the aforesaid Development Contract, as amended are quoted as follows: "WHEREAS, LANDOWNER, is the absolute owner in fee simple of one (1) parcel of land situated at Talamban, Cebu City, Philippines, known as Lot No. 11208 , Cebu Cad. 12 Extension, covered by OCT No. 1451 , with Tax Declaration No. 97GR-02-019 -, containing an area of TWO THOUSAND NINE HUNDRED SIXTY TWO ONLY (2,962) square meters, more or less, . . .; hereinafter referred to as DEVELOPMENT and warrants that said parcel of land is free from any encumbrances, liens of claims thereon, likewise, free from squatters. "WHEREAS, AGRO-MACRO/DEVELOPER owns roads which will give motor vehicle access to DEVELOPMENT; "WHEREAS, LANDOWNER is desirous of having said property developed into a residential subdivision in accordance with the rules and regulations of the House and Land Use Regulatory Board (HLURB); "WHEREAS, AGRO-MACRO/DEVELOPER has the capital to develop the said property into a residential subdivision; "NOW, THEREFORE, the parties hereby agree that: "Sec. 1.0 Road Right of Way . "1.1 AGRO-MACRO/DEVELOPER hereby grant a road right of way through Maryville Subdivision. This right of way, however, is restricted to bonafide owners and/or residents of the lots within DEVELOPMENT and only for access to said DEVELOPMENT. "1.2 For and in consideration of the grant of the right of way to the development and the actual development thereof, LANDOWNER shall cede to AGRO-MACRO/DEVELOPER, an equivalent of 50% of the TOTAL SALABLE LOTS in THE DEVELOPMENT. (per Amendment to Development Contract dated July 10, 2003) "Sec. 2.0 Development Funds . "2.1 AGRO-MACRO/DEVELOPER shall supply all the funds and supervision needed for development, . . .. "Sec. 3.0 Assignment to Developer . "3.1 For and in consideration of the prestations and activities of AGRO-MACRO/DEVELOPER, LANDOWNER shall cede to AGRO-MACRO/DEVELOPER, Fifty (50%) Percent of the TOTAL SALABLE lots in the DEVELOPMENT. (per Amendment to Development Contract dated July 10, 2003) DAcSIC "3.2 Capital Gains and other transfer expenses due on the sale of lots shall be for the account of the owner of the subdivided salable lots." (per Amendment to Development Contract dated July 10, 2003). xxx xxx xxx In reply, please be informed as follows: 1. Pursuant to 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. P.D. No. 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 is of the opinion as it hereby holds that the joint venture entered into by and between the Heirs of Damaso Leyson and Agro-Macro Development Corporation is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. 2. The Landowner and Developer did not convey or transfer their ownership or interest over their parcel of land and road right of way when they contributed their respective landholdings 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 their capital contribution to the joint venture project, therefore, such contributions are not taxable events that will give rise to the payment of regular income tax/creditable withholding tax. The transfers are also not subject to VAT, since the transfers are not in the course of business but capital contributions. 3. The allocation of salable lots of the project between the Heirs of Damaso Leyson and Agro-Macro Development Corporation in consideration of their respective contributions, as stipulated in the Development Contract 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 VAT. The Partition Agreement whereby the Heirs of Damaso Leyson and Agro-Macro 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 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. HEAcDC Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service