BIR Ruling [DA-288-06]

May 2, 2006 BIR RULING [DA-288-06] 22 (B); DA-192-2001 Anna Celestina R . Cruz 63-C Maliksi St., Piahan Quezon City M a d a m : This refers to your letter dated October 11, 2005 stating that sometime in 2003 and 2004, Sta. Lucia Realty and Development, Inc. (the Developer) entered into separate Joint Venture Agreement with various individuals, namely: Felizardo R. Santos, Evelyn S. Senga, Pureplas Inc., Sabrina Chua, Karen Uy, Annie Chua, Ben Legaspi, Cynthia Legaspi, Carlos Alfonso Legaspi, Eleuterio Legaspi, Sandra Legaspi, Maria Lourdes Legaspi, Royale Homes Holdings, Inc., Alfredo L. Chua, Sps. Arturo Tan Lee and Juanita Tan Lee, Lidinila M. Luis-Santos, Angelica L. Cagalingan, Romeo Luis, Jovito Luis and Virginia L. Ballesteros (the Owners) for the development of the latter's properties located in the Municipalities of Cainta and Taytay, Rizal with a total land area of 154,055 sq.m.. Their properties will be developed into a residential estate where the Owners shall be entitled to their share in the resultant subdivision lots of the subdivision. * In accordance with the above-stated joint venture agreements, the Developer has caused the development of the properties and the project is now in the process of segregation and transfer of the corresponding share of the Developer in the resultant titles representing its 35% share [from Felizardo R. Santos and Evelyn S. Senga], 50% share [from Pureplas Inc., Sabrina Chua, Karen Uy, Annie Chua, Ben Legaspi, Cynthia Legaspi, Carlos Alfonso Legaspi, Eleuterio Legaspi, Sandra Legaspi, Maria Lourdes Legaspi and Royale Homes Holdings, Inc.], 52% share [from Alfredo L. Chin and Sps. Arturo Tan Lee and Juanita Tan Lee] and 40% share [from Lidinila M. Luis-Santos, Angelita Cagalingan, Romeo Luis, Jovito Luis and Virginia Ballesteros] in the resultant subdivision lots. STaAcC A Memorandum of Sharing was already executed to transfer the 35% share [from Felizardo R. Santos and Evelyn S. Senga], 50% share [from Pureplas Inc., Sabrina Chua, Karen Uy, Annie Chua, Ben Legaspi, Cynthia Legaspi, Carlos Alfonso Legaspi, Eleuterio Legaspi, Sandra Legaspi, Maria Lourdes Legaspi, and Royale Homes Holdings, Inc.], 52% share [from Alfredo L. Chua and Sps. Arturo Tan Lee and Juanita Tan Lee and 40% share [from Lidinila M. Luis-Santos, Angelita Cagalingan, Romeo Luis, Jovito Luis and Virginia Ballesteros] of the Developer in the resultant subdivision lots. You now request for an opinion on the tax consequences of the following transactions: 1. What would be the taxes involved when the Owners transfer to Sta. Lucia Realty its 35% share [from Felizardo R. Santos and Evelyn S. Senga], 50% share [from Pureplas Inc., Sabrina Chua, Karen Uy, Annie Chua, Ben Legaspi, Cynthia Legaspi, Carlos Alfonso Legaspi, Eleuterio Legaspi, Sandra Legaspi, Maria Lourdes Legaspi and Royale Homes Holdings, Inc.], 52% share [from Alfredo L. Chua and Sps. Arturo Tan Lee and Juanita Tan Lee] and 40% share [from Lidinila M. Luis-Santos, Angelita Cagalingan, Romeo Luis, Jovito Luis and Virginia Ballesteros] of the total saleable lots for its development of the project? Would there be capital gains and documentary stamp taxes (and if there are, how much?) when the parties eventually execute a Deed of Assignment for the resultant lots in the Project. 2. What would be the taxes involved when the parties eventually sell their respective shares of saleable lots to a third party? In reply, please be informed that 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. P.D. No. 929 amended the definition of the taxable corporation so 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 as additional income tax lien. Considering therefore, 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 hereby opines that the joint venture by and between the Owners and the Developer is not subject to income tax under Section 27 of the Tax Code of 1997. The assignment by the Owners to the Developer of its corresponding share of the resultant subdivision lots in the aforesaid project is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax, because the aforestated assignment is a mere return of capital contribution, and therefore not a taxable event. (BIR Ruling No. DA-192-2001 dated October 17, 2001) The Memorandum of Sharing whereby the Owners and the Developer will allocate unto each other their shares 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, because the allocation is made without monetary consideration and is not in connection with a sale. The allocation is made merely to segregate the saleable area between the parties, as the return of the capital which each has contributed. However, the acknowledgement to said Memorandum of Sharing is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. DA-240-2001 dated November 16, 2001) The transfer is also not subject to VAT since under Section 105 of the Tax Code of 1997, any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services and any person who imports goods shall be subject to VAT imposed in Sections 106 to 108 of the same Tax Code. Hence, by contributing their parcels of land, the Owners, neither sell, barter, exchange goods, properties nor render services to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001; BIR Ruling No. DA-115-2001 dated September 5, 2001) It is understood however, that 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 creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001 or capital gains tax under Sections 24(D)(1) or 27(D)(5), as the case may be. Moreover, such 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 property, whichever is higher. Furthermore, the said sale shall likewise be subject to VAT. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes * the owners of the parcels of land, as well as the TCT No., Lot No., land area and the corresponding share of the Owner in the resultant lots per Joint Venture Agreement are listed in Annex "A" hereof (composed of one (1) page, which bears the initial/signature of the herein signatory).