BIR Ruling [DA-286-98]

June 29, 1998 BIR RULING [DA-286-98] Keppel Monte Bank Monte de Piedad St. corner E. Rodriguez Sr. Avenue Cubao, Quezon City Attention: Mr . Hoe Eng Hock Executive Director Gentlemen : This refers to your letter dated May 19, 1998 stating that on April 17, 1995, Monte de Piedad and Savings Bank (now Keppel Monte Bank) (Monte), Philippine Realty Corporation (PRC), MAC Development Corporation (MAC) and H & M Resources (HMR) entered into a joint venture agreement (JVA) under which the said parties contributed land or cash, as the case may be, for the development and construction of the Monte de Piedad Center, viz: prll Partner Land Cash Total Interest Monte P29,418,750.00 P78,000,000.00 P107,418,750.00 38% MAC 29,418,750.00 55,800,000.00 85,218,750.00 30% PRC 44,000,000.00 44,000,000.00 16% HMR 44,000,000,00 44,000,000.00 16% Total P58,837,500.00 P221,800,000.00 P280,637,500.00 100% ============ ============ ============= ===== that among others, the JVA provided that: "3.2 For purposes of convenience in the sale/disposition of the units, MONTE, MAC and H & M hereby transfer and assign their respective shares in the project to PRC, hence title to the condominium units shall be registered in the name of PRC and hereby authorize PRC to sell all the condominium units. The parties' respective shares in the proceeds of the sale, however, net of expenses inclusive of taxes, and after full payment of the development loans granted by MONTE to MAC, PRC and H & M for the construction of the project, shall be distributed in accordance with the hereinabove agreed percentage of sharing." that the joint venture commenced construction of the Monte de Piedad Center in Cebu City, and, during such construction stage and on a pre-selling basis, executed contracts to sell covering twelve (12) units and thirteen (13) parking slots for an aggregate amount of Forty Eight Million Three Hundred Fifty Three Thousand Four Hundred Ninety Seven and 25/100 Pesos (P48,353,497.25); that thereafter, the joint venture suffered management, marketing and financial problems which threatened the entire project, and adversely affected the relationship of the joint venture partners; that the parties then decided that the original arrangement under which the joint venture authorized one partner to sell the project and to apportion the proceeds therefrom, was no longer feasible; that the partners opted instead to divide the entire project among themselves, and for each of them to dispose of their respective share as they deem fit; that to reflect this understanding, the partners' executed a novating agreement dated April 3, 1996, whereby Monte undertook to answer for all expenses necessary to complete the project; that in accordance with the terms of the new joint venture arrangement, Monte disbursed additional sums to complete the construction of the condominium building and pay for administrative costs; that the Novating Agreement provided for the allocation of floor area to the joint venture partners; that under the new joint venture agreement, the partners would have been entitled to receive the units corresponding to the floor area allocated to each of them as a return of equity and via a non-taxable transfer; that Monte caused the return to it of an initial fifty-nine (59) units of the project; that Monte's Trust Division, unaware of the legal consequences of the new joint venture, mistakenly caused the transfer to Monte of the fifty-nine (59) units through the execution of a Deed of Sale instead of a tax-free exchange; that accordingly, on December 27, 1996, a Deed of Absolute Sale was executed on behalf of the joint venture in favor of Monte over the latter's fifty-nine (59) units, and as a result of which, the joint venture paid the documentary stamp taxes and the creditable withholding taxes on the transaction; that as of date, there remains thirty four (34) unallocated units of the Project; that of these units, Unit Nos. PH203, PH204 and 407 shall be jointly owned by the partners; that the remaining thirty one (31) units shall be allocated among the partners, as follows: cdtech To PRC: Unit Nos. 209, 405, 408, 503, 608, 609, PH201; To HMR: Unit Nos. 403, 502, 606, 1406, PH207; To MAC: Unit Nos. 504, 505, 506, 507, 508, 1402, 1403, PH205; and To MONTE: Unit Nos. 201, 402, 602, 604, 605, 607, 903, 1404, 1405, PH209 and PH210 In connection therewith, you are requesting our opinion on the following: "1. That the old joint venture was a taxable joint venture as it has the elements of a taxable joint venture, namely: profit-sharing and joint proprietary interest; "2. That the old Joint Venture Agreement was dissolved and supplanted by the Novating Agreement which provided for its dissolution and the creation of another which, among others, eliminated the element of joint proprietary interest and profit-sharing, and provided instead for the distribution of the capital of the partners; "3. That under the new joint venture, the partners thereto are entitled to a return of equity by way of a tax-free Deed of Exchange, and that the conveyance of the thirty four (34) units to the partners as a return of equity constitutes a tax-free transfer. Upon the disposition by the partners of the units allocated to them, they would be liable for taxes due thereon; "4. That the transfer of the fifty-nine (59) units to Monte by way of a Deed of Absolute Sale actually constitutes a tax-free exchange, the real intention being to distribute to Monte its share in the new joint venture. Consequently, the joint venture is entitled to a refund of the creditable withholding taxes which were paid in connection with the said Deed of Sale." In reply thereto, please be informed as follows: 1. The old joint venture agreement of Monte, PRC, MAC and HMR for the construction of the Monte de Piedad Center in Cebu City contains an express intention to form a separate taxable entity. Accordingly, it is subject to the corporate income tax under Section 27(A) of the Tax Code of 1997, considering that it has the elements of a taxable joint venture, notably, profit-sharing and joint proprietary interest. Thus, under the former scheme, the group Monte, PRC, MAC and HMR, as a joint venture, is subject to the regular corporate income tax on their income derived from the pre-selling of the project; cdta 2. That the old Joint Venture Agreement was dissolved and supplanted by the Novating Agreement which provided for its dissolution and the creation of another which, among others, eliminated the element of joint proprietary interest and profit-sharing, and provided instead for the distribution of the capital of the partners. 3. That under the new joint venture which, among others, did not have the elements of joint proprietary interest and profit-sharing, and is therefore not a taxable joint venture within legal contemplation, the co-venturers are not subject to income tax upon their receipt of the thirty four (34) units allocated to them to wit: To PRC: Unit Nos. 209, 405, 408, 503, 608, 609, PH201; To HMR: Unit Nos. 403, 502, 606, 1406, PH207; To MAC: Unit Nos. 504, 505, 506, 507, 508, 1402, 1403, PH205; and To MONTE: Unit Nos. 201, 402, 602, 604, 605, 607, 903, 1404, 1405, PH209 and PH210 and that upon the subsequent disposition by the co-venturers of the units allocated to them, the gain that may be realized by them from such sale will be subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997 and to the creditable withholding tax under Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94 is hereby confirmed (BIR Ruling No. 274-92 dated September 30, 1992; BIR Ruling No. 010-96 dated January 23, 1996; BIR Ruling No. 065-97 dated February 10, 1997); and 4. The above notwithstanding, this Office, with the exception of the request for refund on DST, is not yet prepared to make a categorical ruling on the request for refund of the alleged erroneous withholding tax payment. Section 185 of the Revised Documentary Stamp Tax Regulations (Regulations No. 26) provides that "conveyances of realty not in connection with a sale to trustees or other persons without consideration are not taxable". Thus, if the transfer of the fifty-nine (59) units by the joint venture to Monte is properly considered under this well-settled exception, the same would likewise be taken as a mere return of its capital investments in the joint venture project without consideration and not in connection with a sale. Consequently, such transfer would not have been subjected to the creditable withholding tax under Revenue Regulations No. 12-94 and to the documentary stamp tax under Section 196 of the Tax Code, as amended, but subject only to the documentary stamp tax pursuant to Section 188 of the same Code. (BIR Ruling No. DA-065-97 dated February 10, 1997). cdti However, under the situation obtaining in your case, where there was an alleged misapplication of the legal means employed by the co-venturers to cause the transfer of the allocable floor units from one partner to another for which a deed of sale was effected instead of a deed of assignment without consideration, this Office likewise holds that: 1) The previous Deed of Sale must first be invalidated and in lieu thereof, a Deed of Assignment to recognize the tax-free return of equity to Monte, consisting of fifty-nine (59) units of the project, must be executed by the parties. This shall operate as a condition precedent before the erroneous payment of applicable taxes could be recognized. As it is, the Deed of Sale under consideration is valid on its face and it is not the province of this Office to declare its nullity in the absence of an express act of abrogation by the parties to the contract themselves. 2) The Documentary Stamp Tax (DST) is ordinarily not payable under a valid conveyance of realty without stated consideration. However, the liability for DST attaches on mere execution of a contract or in respect of a transaction so had or accomplished, as in the Deed of Sale in the instant case, without regard to any extraneous circumstance which may affect its validity. (Section 173, Tax Code of 1997). Hence, no refund of DST based on subsequent invalidity of a contract can be recognized. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. LLjur Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue