BIR Ruling [DA-324-00]

August 25, 2000 BIR RULING [DA-324-00] Pryce Corporation 17th Floor Pryce Center 1179 Don Chino Roces Avenue cor. Bagtikan St., Makati City Attention: Mr . Agapito A . Leyson, Jr . AVP-Comptroller Gentlemen : This refers to your letter dated July 21, 2000 requesting for the exemption from the payment of value-added tax (VAT) and creditable withholding taxes (CWT) relative to the transfer of condominium units to your joint venture partners. cEaDTA It is represented that your company, Pryce Corporation, commenced development works on an office condominium project (Pryce Tower) pursuant to Development Permit dated May 25, 1996 issued by the Housing and Land Use Regulatory Board (HLURB); that previously, your company entered into joint venture agreements with interested investors for the construction of high-rise condominium to help defray the project funding requirements and ensure completion of the project as scheduled; that under a separate investment agreements, the following investors made equity contributions to the project: Amount % Equity Contributed 1. Multi-Adweal Corporation P34,257,500 10% 2. JGF Holdings 17,128,750 5% 3. Four Treasures Development Corp. 17,128,750 5% 4. Pryce Plans, Inc. 13,500,000 3.94% 5. Pryce Gases, Inc. 49,562,663 14.47% 6. Pryce Properties Corp. (now Pryce Corp.) 210,997,337 61.59% P342,575,000 100% ========== ===== that under the investment agreement, the investor is given the option to convert his equity into condominium units of his choice corresponding to his equity interest in the project; that at present, the completed Pryce Tower is comprised of eighty-six (86) office condominium units and one hundred thirty three (133) parking lots to be shared proportionately (in accordance with agreed investment ratio) among the aforementioned JV partners. For the purpose of distributing the units to the JV partners, as above indicated, you now request for a formal BIR Ruling to the effect that: 1. Transfer of condominium units to JV partners are return of capital/distribution of their investment in the JV project, and said transaction is not in the nature of "sales, barters, exchanges and leases of goods and properties, or rendering services" as defined under Section 105 of the Tax Reform Code of 1997. Therefore, these transactions are not covered by VAT. 2. Likewise, since the transactions are not sale of real estate properties, these are not subject to CWT imposed on real estate sales as implemented under Paragraph (J) [sic] {Section 2.57.2(J)} of the Revenue Regulations No. 2-98 issued on April 17, 1998 by the BIR. CTAIHc In support of your request, you have submitted the following pertinent documents: i) Memoranda of Agreement with the above-named investors executed in 1997, 1996 and 1995 defining the mutual covenants, stipulations, participation and obligations of the partners in the joint venture project. ii) Development Permit and License to Sell for the Pryce Tower project; and iii) Inventory of condominium units of the completed Pryce Tower. In reply, please be informed as follows: 1. 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 ) association or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction project or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. Accordingly, the joint venture of Pryce Corporation and its joint venture partners for the construction of the condominium project is not subject to the corporate income tax under Section 27 of the Tax Code. 2. The allocation and distribution of the completed condominium units to the joint venture partners in accordance with their respective equity contributions as stipulated in the agreement is not subject to income tax or withholding tax. Neither will the deed of return/distribution be subject to the documentary stamp tax imposed under Section 196 of the Code since allocation/distribution is without consideration and constitutes mere return of capital. However, the acknowledgment to the return/distribution agreement is subject to the documentary stamp tax under Section 188 of the Code. 3. Since the transfer of condominium units to the joint venture partners are mere return/distribution of their investment in the JV project, said transaction is not in the nature of "sales, barters, exchanges and leases of goods and properties, or rendering services" as defined under Section 105 of the Tax Reform Code of 1997. Therefore, said transactions are not covered by VAT. However, the subsequent sales of the condominium units by the joint venture partners to their customers are subject to the 10% VAT. 4. Upon the subsequent disposition by the co-venturers (Multi-Adweal Corporation; JGF Holdings; Four Treasures Development Corp.; Pryce Plans, Inc.; Pryce Gases, Inc.; Pryce Corporation) of the units distributed to them, the gain that they may respectively realize from such sale will be subject to the regular income tax rates under Section 27(A) of the Code and to the creditable withholding tax under Sec. 2.57.2(J) of Revenue Regulations No. 2-98, as amended by RR 8-98. Such sale shall likewise be subject to the documentary stamp tax under Section 196 of the Code, based on the gross selling price or fair market value/zonal value of the properties, whichever is higher. (BIR Ruling No. 010-96 dated January 23, 1996; BIR Ruling DA-065-97; BIR Ruling No. 605-99 dated October 12, 1999. This ruling is being issued on the basis of the foregoing facts as represented. However, if it will be disclosed that the facts are different, then this ruling shall be deemed null and void. Very truly yours, (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group