BIR Ruling [DA-349-05]

August 15, 2005 BIR RULING [DA-349-05] 22 (B); DA 013-05 V.C. Mamalateo & Associates Unit 6C, 20 Lansbergh Place 170 T. Morato Avenue cor. Castor Street Quezon City Attention: Atty. Joy B. Mamalateo Gentlemen : This refers to your letter dated June 14, 2005 stating that on January 20, 1998, Peaksun Enterprises and Export Corporation (PEAKSUN) is a corporation duly organized and existing under and by virtue of the laws of the Philippines with business address at 1507 Princeton Street, Mandaluyong City; that PEAKSUN has entered into a joint venture agreement with Mr. Felix AngPing (Mr. AngPing),the registered owner of a parcel of land containing an area of 496 square meters situated in Shaw Boulevard corner Princeton Street, Bo. Wack-Wack, Greenhills, Mandaluyong; that the Parties agreed to undertake the development of the Peaksun Condominium; that it was agreed by both Parties, that Mr. AngPing will contribute the above-described parcel of land, and PEAKSUN will infuse capital, as well as technical and development works; that it was further agreed by the Parties that Peaksun Condominium shall consist of seven (7) floors and the share of the Parties in the profit of the joint venture project shall be as follows: PEAKSUN = Eighty Nine Percent (89%) or 6 floors Mr. AngPing = Eleven Percent (11%) or 1 Floor and that finally, it was agreed by the Parties that Mr. AngPing shall hold in trust the Peaksun Condominium for the benefit of PEAKSUN by virtue of a Deed of Trust and Assignment dated January 20, 1998. Based on the foregoing representations, you now request confirmation of your opinion that the joint venture agreement entered into by PEAKSUN and Mr. AngPing is not subject to any tax pursuant to Sections 22(B) of the Tax Code of 1997. In reply thereto, please be informed that your opinion is hereby confirmed as follows: 1. Section 22(B) of the Tax Code of 1997 provides that 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. SCHIac It is to be emphasized, however, that P.D. 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 Agreement entered into by and among PEAKSUN and Mr. AngPing is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997 and is not required to file quarterly and final or adjustment/income tax returns. However, the co-venturers are separately subject to the regular corporate/individual income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. 2. The allocation and distribution of their respective shares in the Peaksun Condominium in consideration for their respective contributions to the said agreement 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. Moreover, in the event that any party defer its right to receive a specific allocation to a later phase of the project for as long as such allocation constitutes part of the total return of its capital, such deferment is still not subject to the aforementioned taxes. However, 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 No. 2-98, as amended by Revenue Regulations Nos. 6-2000 and 12-2000. In addition thereto, 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. ( BIR Ruling No. DA-013-05 dated January 19, 2005 ) 3. The Deeds of Partition by the parties whereby they will allocate and distribute among them their respective shares in the project, in exchange for their respective contributions, being without monetary consideration is not subject to value-added tax, income/creditable and documentary stamp taxes. ( BIR Ruling Nos. 207-92 dated July 16, 1992; 349-93 dated July 30, 1993; DA Ruling No. 025-95 dated January 11, 1995 ) 4. The joint venture is subject to the 10% VAT as a contractor imposed under Section 108(A) of the Tax Code of 1997. ( BIR Ruling Nos. DA134-00 dated March 2, 2000; BIR Ruling No. 098-94 dated April 22, 1994 ) However, the transfer of the parcel of land by Mr. AngPing to the Peaksun Condominium Project is 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 shall be subject to VAT imposed in Section 106 to 108, supra .Hence, by contributing its parcel of land, Mr. AngPing neither sells, barters, exchanges goods, property nor renders services subject to VAT. ( BIR Ruling No. DA013-05 dated January 19, 2005 citing BIR Ruling Nos. DA240-01 dated November 16, 2001; DA115-01 dated September 5, 2001 ) DEICTS 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service