BIR Ruling [DA-367-05]

August 25, 2005 BIR RULING [DA-367-05] 22 (B); DA-192-2001 Dante D. Torres Certified Public Accountant 2nd Floor Queensland Commercial Plaza Dolores, San Fernando City S i r : This refers to your letter dated July 27, 2005 requesting on behalf of your client, Hanamel Rolgins Resources Corporation, for a ruling on the tax consequence of a Joint Venture Agreement, to wit: "My client Hanamel Rolgins Resources Corporation, a corporation engage in real estate business is an owner of two (2) adjacent parcel of land situated at Mariveles, Bataan: Lot 6-A with an area of 30,012 square meters described and embraced under TCT No. T-187544 and Lot 6-B with an area of 36,733 square meters described and embraced under TCT No. T-187545 with combined area of 66,749 square meters. In 1996, Hanamel Rolgins Resources Corporation started the development of the above mentioned Lot 6-B into residential lots but due to business reversal especially in real estate business up to present the only development introduced is the titling of the subdivision lots and open spaces which resulted into 236 Transfer Certificate of Titles inclusive of TCT No. T-188155 to TCT No. T-188390. Early this year Hanamel Rolgins Resources Corporation entered into a joint venture project with Culiat Realty and Marketing Corporation which will provide the finances and the technical know-how to develop the 66,749 square meters with agreed sharing of 55% share to the developer and 45% share to the owner. In the light of the foregoing and in behalf of my client, I am seeking for an opinion by way of a ruling that the transfer or assignment by Hanamel Rolgins Resources Corporation of the 236 lots inclusive of TCT No. T-188155 to TCT No. T-188390 or 36,733 square meters representing more or less 55% of the total project to Culiat Realty and Marketing Corporation are exempted from Expanded Withholding Tax under Revenue Regulations No. 6-85 as amended by Revenue Regulations No. 2-98 and documentary Stamp Tax under Sec. 195 of Revenue Regulation No. 86, otherwise known as the Revised Documentary Stamp Tax Regulations. Enclosed you will find photo copies of the titles and their corresponding tax declarations and the joint venture agreement as basis for your opinion. Thank you for your usual attention." 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 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 the Owner and the Developer is not subject to income tax under Section 27 of the Tax Code of 1997. aDcHIS The assignment by the Owner to the Developer of its corresponding share of the resultant subdivision lots in the aforesaid project is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax, because the aforestated assignment is a mere return of capital contribution, and therefore not a taxable event. (BIR Ruling No. DA-192-2001 dated October 17, 2001) The Partition Agreement whereby the Owner and the Developer will allocate unto each other their share in the saleable areas, 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 areas between the parties, as the return of the capital which each has contributed. However, the acknowledgement to said Partition 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 the parcels 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) 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 27(D)(5), whichever is applicable. Moreover, such sale shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, 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. 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 null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service