BIR Ruling [DA-333-05]

July 29, 2005 BIR RULING [DA-333-05] S.22 (B); DA-240-2001/11-16-2001 Concepcion Grande Development Incorporated 2/F 2281 Pasong Tamo Ext., Makati City, Metro Manila Attention: Joy B. Fajardo Chief Accountant Gentlemen : This refers to your letter dated June 26, 2005 requesting for a ruling on the following matters of concern: (1) that the joint venture formed by D.T. Almeda & Sons, Inc. (D.T. Almeda for brevity) and Concepcion Grande Development, Inc. (CGDI for brevity) for the purpose of undertaking a construction project does not fall within the definition of a Corporation pursuant to Section 22 (B) of the Tax Code of 1997, hence, it is not subject to the corporate income tax provided further under Section 27(A) of the Tax Code of 1997; (2) that the allocation of lots and the issuance of the corresponding Transfer Certificates of Title to D.T. Almeda and CGDI representing their respective interest in the project are not subject to income and/or expanded withholding tax because it is only upon the sale or disposition to third parties of the units allocated that the gain realized in the said transaction will be subject to the regular income tax liability under Section 27(A) of the Tax Code of 1997 and to the expanded withholding tax under Revenue Reg. No. 6-85, as amended by RR 2-98; and (3) that the joint venture is exempt from payment of Documentary Stamp Tax and Value-Added Tax. The facts, as you represented, are as follows: D.T. Almeda, a corporation duly organized and existing under the laws of the Philippines is the registered owner of six (6) parcels of land with an aggregate land area of 94.3741 hectares, more or less, registered under Transfer Certificates of Title Nos. 19039, 1416, 19298, 4199, 1415 and 6199 of the Registry of Deeds for the City of Naga. CGDI, likewise a corporation duly organized and existing under the laws of the Philippines is engaged in property, development and construction business. As stipulated in the Joint Venture Agreement (JVA for brevity) dated May 27, 2003 entered into by D.T. Almeda & CGDI as landowner and developer, respectively, the former shall contribute the above parcels of land whereas the latter shall provide cash and development expertise for the construction and development of the land into residential, commercial, industrial and institutional areas with appurtenant common areas (the Project for brevity). The Project shall consist of the planning and phased development of the above parcels of land. Pursuant to a Memorandum of Agreement dated April 18, 2005, the parties started the development of St. Jude (Thaddeus) Village 1 consisting of 3.9 hectares located at Concepcion Grande, Naga City. The succeeding phases will involve the development of St. Jude (Thaddeus) Village 2, Village 3, Village 4, St. James Village, St. Peter's Square and other future subdivision projects. As a return for their respective contributions to the Project, CGDI and D.T. Almeda shall each acquire interest or ownership on a 60%-40% basis. The allocation of salable lots in the Project shall correspondingly be divided between the parties in proportion to their respective interest. IaAHCE In view of the foregoing, you request confirmation of the following: a) that the Joint Venture between D.T. Almeda and CGDI for the construction and development of the 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; b) that the issuance of the corresponding Transfer Certificates of Title by the Registry of Deeds of Naga City to D.T. Almeda and CGDI; representing their respective interest in the Project as stipulated in the JVA are not taxable events , therefore not subject to income and/or expanded withholding tax ; c) that it is only upon the sale or disposition to third parties of the units allocated that the gain realized by the parties in the said transaction will be subject to the regular income tax under Section 27(A) of the Tax Code of 1997 and to the expanded withholding tax under Revenue Reg. No. 6-85, as amended by RR 2-98; d) that the Joint Venture is further exempt from payment of Documentary Stamp Tax and Value-Added Tax ; and e) that the aforementioned tax exemptions will not only be credited in favor of St. Jude (Thaddeus) Village 1 but all succeeding subdivision projects namely: St. Jude (Thaddeus) Village 2, Village 3, Village 4, St. James Village, St. Peter's Square and other future projects will be accorded the same tax treatment. In reply please be informed that 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 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 hereby confirms your opinion that the Joint Venture between D.T. Almeda and CGDI for the construction and development of the Project will not create a taxable joint venture; hence, the same is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997. (BIR Ruling Nos. DA-065-97; DA-286-98; DA-061-99; DA-079-2-08-99; DA-107-99). HCEcaT The allocation of the saleable lots in the Project divided between the parties in proportion to their respective interest and the issuance of the corresponding Transfer Certificates of Title by the Registry of Deeds of Naga City to D.T. Almeda and CGDI, representing their respective interest in the Project as stipulated in the JVA are not taxable events, therefore not subject to income and/or expanded withholding tax; (BIR Ruling No. DA-192-2001 dated October 17, 2001) Moreover, the JVA 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 that each has contributed. However, the acknowledgement to said JVA 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 the parcel of land, the Owner, neither sells, barters, exchanges goods, properties nor renders service 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) The aforementioned tax exemptions will not only be credited in favor of St. Jude (Thaddeus) Village 1 but all succeeding subdivision projects namely: St. Jude (Thaddeus) Village 2, Village 3, Village 4, St. James Village, St. Peter's Square and other future projects will be accorded the same tax treatment. It is understood however, that upon the subsequent disposition by the co-venturers of the saleable lots 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 No. 2-98, as amended by RR No. 6-2001, to the value added tax under Section 106 or capital gains tax under 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. 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 void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service