BIR Ruling [DA-347-05]

August 12, 2005 BIR RULING [DA-347-05] 22 (B); DA-240-2001 Maria Theresa A. Ceballos Accounting Services Mahayahay, A. Lopez St. Calamba St., Cebu City Attention: Ms. Maria Theresa C. Rosell, CPA Gentlemen : This refers to your letter dated August 12, 2003, as indorsed by Regional Director Jaime B. Santiago, Revenue Region No. 13, Cebu City, requesting for a ruling on the tax consequences of a Joint Venture Agreement executed by and between your clients, Spouses Emmanuel and Monica Climaco with EMCO Development Corporation (EMCO for brevity) for the development of the Spouses properties into a residential subdivision. Documents submitted show that Spouses Emmanuel and Monica Climaco are the absolute co-owners of eleven (11) parcels of land covered by Transfer Certificates of Title Nos. 155157, 155158, 155159, 155160, 155161, 155162, 155163, 155164, 155165, 155166 and 155167 with an aggregate area of 1,200 sq.m.; that EMCO is a corporation organized and existing under and by virtue of Philippine laws; that EMCO agreed to undertake the development of the Spouses properties into a residential subdivision; and that in consideration of the performance of EMCO's obligation, the owners agreed to compensate the said entity with residential lots, constituting seventy percent (70%) of the net saleable area of the project. In reply, please be informed as follows: 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. DCESaI 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 is of the opinion as it hereby holds that the joint venture entered into by and between Spouses Emmanuel and Monica Climaco with EMCO is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. The allocation of saleable lots of the project between Spouses Emmanuel and Monica Climaco and EMCO, in consideration of their respective contributions, as stipulated in the Joint Venture Agreement is not a taxable event and is not subject to income tax or any withholding tax because the allocation is a mere return of capital that each has contributed. (BIR Ruling No. DA-192-2001 dated October 17, 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 their parcels of land, the owners, neither sell, barter, exchange goods, property 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) The Partition Agreement whereby Spouses Emmanuel and Monica Climaco and EMCO will allocate unto each other their share 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, income tax and any withholding tax because the allocation is made without monetary consideration and is not in connection with a sale. The partition is made merely to segregate the saleable area between the parties, as the return of the capital which each has contributed. However, the acknowledgment to said Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. It is understood however, that upon 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), 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. CTIEac 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 will be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service