BIR Ruling [DA-330-06]

May 18, 2006 BIR RULING [DA-330-06] 22 (B); DA-192-2001 ASB Development Corporation 4th Floor, St. Francis Square Doa Julia Vargas Avenue cor. Bank Drive, Ortigas Center Mandaluyong City Attention: Mr. Rolando P. Domingo Senior Vice-President Gentlemen : This refers to your letter dated May 09, 2006 stating that ASB Development Corporation (ASBDC) is a corporation organized and existing under and by virtue of the laws of the Republic of the Philippines. ASBDC will enter into a Joint Development Agreement with Equitable PCI Bank (EPCIB), a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with office address at Equitable PCI Bank, Tower 1, Makati Avenue corner H.V. Dela Costa Street, Makati City and with The Project Governing Board for the Rehabilitation of the ASB Group of Companies (PGB), a board created and organized pursuant to the Rehabilitation Plan of ASB Group of Companies with office address 4th Floor St. Francis Square, Doa Julia Vargas Avenue corner Bank Drive, Ortigas Center, Mandaluyong City for the construction and development of St. Francis Square Tower Project as provided in a Memorandum of Agreement among them. As provided in the Memorandum of Agreement, ASBDC will contribute the lot where the Project will be constructed while EPCIB will convert its receivables from ASBDC into equity into the Project and ASBDC in cooperation with PGB will complete the Project. As proportionate return of their respective contributions to the Project, the parties shall receive condominium units and exclusive right to use parking spaces on the Project which had been determined by drawing of lots. With respect to EPCIB, the mortgage on ASBDC's property will remain until the issuance of the Condominium Certificate of Title (CCTs). Based on the above provision of the Agreement, you would like to request for a ruling to confirm of your opinion that: 1. The Agreement among ASBDC, EPCIB and PGB is in the nature of a joint venture for the construction and development of St. Francis Square Tower Project and will not create 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 Titles by the Registry of Deeds of Mandaluyong City directly in the name of the parties representing their interest in the Project as stipulated in their Agreement is not taxable event that will give rise to the payment of regular income tax/creditable withholding tax because the allocation is a mere return of their capital contribution; 3. The allocation of the units is also not subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, because the allocation is not in connection with a sale. 4. The allocation of the units is also not subject to VAT since under Section 105 of the Tax Code of 1997, as amended, 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 Section 106 to 108 of the same Code. STcHDC 5. The subsequent disposition/sale of the allocated units by EPCIB is subject to creditable withholding tax under Revenue Regulations No. 2-98 as amended by Revenue Regulations No. 6-2001 and to documentary stamp tax imposed under Section 196 of the Tax Code, as amended. Since EPCIB is a bank, it is not subject to VAT but to gross receipts tax (GRT) on the gain on its subsequent sale/disposition. 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 ASBDC, EPCIB and PGB is not subject to income tax under Section 27 of the Tax Code of 1997. The contribution of parcels of land by ASBDC where the Project will be constructed is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax, because the aforestated contribution is a mere return of capital contribution, and therefore not a taxable event. (BIR Ruling No. DA-192-2001 dated October 17, 2001) The Sharing Agreement whereby ASBDC, EPCIB and PGB 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 Sharing 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, 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, ASBDC neither sell, barter, exchange goods or 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) HTacDS 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) or Section 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, but with regard to EPCIB, since it is a bank, it is subject to gross receipts tax (GRT) on the gains therefrom. 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