BIR Ruling [DA-317-05]

July 13, 2005 BIR RULING [DA-317-05] 22 (B); DA-240-2001 Atty. Alan B. Quintana 2nd Floor, Renaissance Tower Meralco Ave., Pasig City Gentlemen : This refers to your letter dated October 4, 2004 requesting on behalf of your client, for a ruling on the exemption from the payment of capital gains tax and documentary stamp tax of a joint venture for the development of a residential subdivision in Naga City. It appears that Ms. Magdalena Abella-Jimenez is the registered and legal owner of several parcels of land located at Barangay Concepcion, Naga City; that pursuant to the joint venture agreement between Ms. Jimenez and Fil-Estate Properties, Inc. (FEPI),the parties shall pool their respective resources for the development of the above-mentioned parcels of land into a residential subdivision with a 60%-40% sharing on the resultant saleable lots; that Ms. Jimenez will contribute her landholdings while FEPI will finance and infuse technical and development works on the subdivision project as their capital contributions; that the parties are now in the process of segregating the titles, and consequently will assign 60% of the saleable lots to FEPI representing its share in the subdivision project. In reply, please be informed as follows: 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 participation), 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 a 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 Ms. Jimenez and FEPI is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. The allocation of saleable lots of the project between Ms. Jimenez and FEPI, in consideration of their respective contributions, as stipulated in their joint venture 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. (BIR Ruling No. DA-192-2001 dated October 17, 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 its parcels of land, Ms. Jimenez, neither sells, barters, exchanges goods, property nor renders services subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001; BIR Ruling No. DA-115-2001 dated September 5, 2001) The Project Partition whereby Ms. Jimenez and FEPI 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 has contributed. However, the acknowledgment to said Project Partition is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. 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 Section 24(D)(1) of the Tax Code of 1997, as amended, 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 null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service