BIR Ruling [DA-385-06]

June 23, 2006 BIR RULING [DA-385-06] 22 (B); DA-192-2001 Casimiro Development Corporation 2nd Floor Casimiro Building Alabang-Zapote Road Zapote, Las Pias City Attention: Mr. Teofilo P. Casimiro President Gentlemen : This refers to your letter dated June 20, 2006 requesting a ruling on the tax consequence of a joint venture by and between Rosalina M. Lopez and Casimiro Development Corporation (CDC). Documents submitted show that on November 2, 2005, CRC entered into a Joint Venture Agreement with Rosalina M. Lopez for the land and site development and construction of housing units to be known as Casimiro Westville Homes Phase 5 located at Brgy. Ligas III, Bacoor, Cavite, Rosalina M. Lopez will contribute the aforestated parcel of land with a total area of Seven Thousand Six Hundred Thirty Nine (7,639) square meters covered by TCT No. T-809799 issued by the Registry of Deeds for the Province of Cavite. CDC shall undertake at its own expenses the land and site development and the construction of housing units. In return for their respective contributions to the Project, CDC and Rosalina M. Lopez will acquire separate ownership of specific designated units as specified in the Subdivision Agreement. The said units will thereafter be offered for sale. 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 so 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 Rosalina M. Lopez and CDC is not subject to income tax under Section 27 of the Tax Code of 1997. The assignment by Rosalina M. Lopez to CDC 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 Rosalina M. Lopez and CDC will allocate unto each other their shares 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, 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 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. 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 her parcel of land, Rosalina M. Lopez, neither sells, barters, exchanges goods, properties 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) 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 24(D)(1) or 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. 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 as null and void. cSIACD Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service