BIR Ruling [DA-327-04]

June 16, 2004 BIR RULING [DA-327-04] 22 (B) DA-488-98 ASB Development Corporation ASB Center, 114 Benavidez St. Legaspi Village, Makati City Attention: Mr. Rolando P. Domingo Senior Vice-President Gentlemen : This refers to your letter dated February 20, 2004 requesting in effect, for exemption from the payment of creditable withholding tax and value-added tax relative to the Memorandum of Agreement (MOA) entered into by and between ASB Development Corporation (ASBDC) and the Project Governing Board (PGB) of the Asset Pool of the ASB Group of Companies. Based on your representations, as well as from the documents submitted, the facts are as follows: EIDaAH ASBDC is a corporation organized and existing under and by virtue of the laws of the Philippines, with principal office at ASB Center Building, 114 Benavidez Street, Legaspi Village, Makati City, while PGB is an entity duly authorized by the Securities and Exchange Commission (SEC) to manage the Asset Pool under the ASB Rehabilitation Plan particularly providing for the completion of the buildings of ASB Group of Companies still unfinished that said parties entered into a Memorandum of Agreement, whereby PGB will contribute capital from the Asset Pool for the completion of the construction of the "BSA Twin Tower" Project, a 51-storey building located at Bank Drive, Ortigas Center, Mandaluyong City and is constructed on lots whose combined area of 3,037.32 sq.m. and covered by Transfer Certificates of Title (TCT) Nos. 9834 and 9835 are owned by ASBDC (formerly Tiffany Tower Realty Corporation); that the capital contribution of PGB to be used for the completion of the construction of the said project came from the earnings of sale of shares of DBS Philippines which has already been subjected to final tax on capital gains tax on sale of shares and from the sale of tax credit certificates issued by the BIR for unutilized creditable withholding tax of ASB; that such proceeds from the sale of DBS shares and tax credit certificates are intended to pay ASB's unsecured obligations thru the Asset Pool or in short, money payment to qualified unsecured creditors/secured creditor-buyers; and that as a return of its investments, the Asset Pool which is an unincorporated entity and representing the qualified unsecured creditors and the qualified creditor-buyers of The Legaspi Place Project shall instead be entitled to shares in the net saleable area of the building and will receive their unit share directly in their name. You now request for a ruling to confirm your opinion that: 1. The agreement (MOA) in the nature of joint venture/consortium among ASBDC, PGB and other parties, for the construction of BSA Twin Towers Commercial/Residential Condominium Project will not create a taxable joint venture within the meaning of Section 22(B), in relation to Section 27(A) of the Tax Code of 1997; 2. The allocation of the units and issuance of the corresponding Condominium Certificates of Title by the Registry of Deeds of Mandaluyong City to the qualified unsecured creditors/secured creditor-buyers representing their respective shares or participating interest in the project as stipulated in MOA are not taxable events, therefore, not subject to income tax and/or expanding withholding tax because it is only upon sale or disposition of the units allocated to them to other third parties that gain realized in the said transaction will be subject to the income tax and expanded withholding tax; 3. Considering that the source of the money contributed to the construction of the project were already subjected to final tax on sale of shares and from sale of tax credits issued by the Bureau of Internal Revenue, the more reasons that the distribution of the units to the qualified unsecured creditors and secured creditor buyers is not subject to income tax and expanded withholding tax, as well as value-added tax. 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. cCAIDS P.D. No. 29 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 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 ASBDC and PGB is not subject to income tax under Section 27 of the Tax Code of 1997. The allocation of the units and issuance of the corresponding Condominium Certificates of Title by the Registry of Deeds of Mandaluyong City to the qualified unsecured creditors/secured creditor-buyers representing their respective shares or participating interest in the project as stipulated in MOA are not 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-488-98 dated November 16, 1998 ) The Partition Agreement whereby ASBDC and PGB, representing the qualified unsecured creditors/secured creditor-buyers will allocate unto each other their share or participating interests in the project, 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 not in connection with a sale. The allocation is made merely to segregate their share or participating interests in the project, as the return of the capital which each has contributed. However, the acknowledgement to said Partition Agreement 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, only persons 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. ( 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 ASBDC or PGB's qualified unsecured creditors and secured creditor-buyers, whose names are listed in Annex "B" hereof (composed of seven (7) pages, each page bearing the initial/signature of the herein signatory) 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), 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 properties, whichever is higher. Furthermore, the said sale shall likewise be subject to VAT. This ruling is without prejudice to any tax consequences arising from the sale by ASBDC or PGB of the said condominium units to parties other than those enumerated in the afore-quoted Annex "B". Furthermore, 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service