BIR Ruling [DA-342-04]

June 24, 2004 BIR RULING [DA-342-04] 22 (B) DA227-03 Laya Mananghaya & Co . 22/F Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty. Francisco G. Tagao Principal, Tax & Corporate Services and Atty. Melea B. Solis-Cruz Manager, Tax & Corporate Services Gentlemen : This refers to your letter dated June 18, 2004 stating that your client, Ayala Land, Inc. (ALI) entered into a Joint Development Agreement (JDA) with Active Research Management Corporation (Active),Balibago Land Corporation (Balibago),Campton Land, Inc. (Campton),Data Processing Service Corporation (Data),Greenfield Development Corporation (GDC),Helena Property Ventures Corporation (Helena),Community Innovations, Inc. (CII),and Laguna Technopark, Inc. (LTI);that the parties to the joint venture agreed to pool parcels of land and cash for the purpose of constructing and developing the Loop Road and the portions of the said Gross Parcels, and the allocation among the parties herein, as their respective return of capital, of the subdivided lots in order to provide a direct and continuous road network within Barangay Loma, Municipality of Bian in the Province of Laguna; that the project will facilitate the linkage of a major national highway to smaller roads within the Municipality of Bian, thereby improving traffic flow and accessibility within existing roads in the municipality; that the project likewise confers benefits not only to the developments of GDC and its affiliates, but even to the existing communities and developments surrounding such road right of way; that Active, Balibago, Campton, Data, Helena, CII, LTI and ALI, as owners of parcels of land adjacent to or will be traversed by such road right of way, have agreed to contribute to the project the said parcels of land as well as cash for its development that will constitute the allocation of the herein parties; that GDC, on the other hand, shall contribute cash to finance the costs of constructing and developing the portions of the subject parcels of land that will constitute the Loop Road, including the project management services for overseeing and implementing the project; that in consideration of, and in return for, their respective contributions to the project, the parties agreed for the subsequent allocation and distribution among themselves of the lots constituting or benefiting from such common road right of way. In connection therewith, you now request confirmation of your opinion that the JDA executed by and among the above-named parties is a non-taxable entity, exempt from corporate income tax, creditable withholding tax, final withholding tax, value-added tax and documentary stamp tax. In reply thereto, 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 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. It is to be emphasized, however, that P.D. 929 excluded joint venture formed for the purpose of undertaking construction projects from the definition of the term "Corporation" because (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. 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 holds that the JDA entered into by the above-named parties for the construction and development of the Loop Road and the portions of the said Gross Parcels is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997. ( BIR Ruling No. DA273-03 dated August 20, 2003 ) Moreover, the allocation and distribution of the subdivided lots between and among the parties in consideration of their respective contributions, as stipulated in the JDA is not a taxable event and is not subject to income tax, withholding tax, value-added tax and documentary stamp tax because the allocation is a mere return of capital that each has contributed. ( BIR Ruling Nos. 10-96 dated January 23, 1996; DA065-97 dated February 10, 1997; DA286-98 dated June 29, 1998 ) On the other hand, the transfer of the parcels of land to a common ownership as well as the allocation of the developed lots to the parties pursuant to their JDA is not subject to the capital gains tax of 6% imposed under Section 24(D)(1) of the Tax Code of 1997. ( BIR Ruling No. 170-03 dated May 30, 2003; DA274-03 dated August 21, 2003; DA214-02 dated November 21, 2002 ) Furthermore, the subsequent allocation and distribution of the lots constituting or benefiting from such road development project by virtue of the Deed of Partition, i.e., by allocating and distributing among the parties to the joint venture their respective shares in the project in exchange for their respective contributions is without monetary consideration but merely acknowledges and confirms the title and ownership of the members of the joint venture over the subject lots. Thus, the transfer is not in the course of business but a mere capital contribution and return of capital, as such, the same is not subject to value-added tax. Likewise, the Deed of Partition is not subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997.( BIR Ruling No. DA227-03 dated August 21, 2003; DA273-03 dated August 20, 2003 ) Finally, this will authorize the Revenue District Officer (RDO) of the revenue district where the properties are located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the transfer of the Project Land Area to the parties herein based on their respective allocations without need of presentation of proof of payment of the income tax, creditable withholding tax, documentary stamp tax and value-added tax. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service