BIR Ruling [DA-389-03]

October 30, 2003 BIR RULING [DA-389-03] 22 (B) 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 October 21, 2003 stating that Pinama Fishpond Industries Corporation (Owner) is the absolute and registered owner of a parcel of land situated in Bacoor, Cavite covered by TCT No. T-189036 issued of Deeds for Cavite and containing an area of 47,003 square meters; that on the hand, Casimiro Development Corporation (Developer) is a domestic corporation engaged in the construction of housing units; that on April 3, 2003, a Joint Venture Agreement (JVA) was entered into by and between the Owner and Developer for the aforesaid property into a residential subdivision known as the Casimiro Baytown Village located in Habay 1, Bacoor, Cavite; that the developed saleable lots of the project shall be shared 20% for the Owner and 80% for the Developer; that all the individual titles corresponding to the share of the Owner shall be placed in the name of the Owner and turned over to the Developer as soon as the individual titles to the subdivision project are issued by the Register of Deeds; and that all the individual titles corresponding to the share of the Developer shall be placed in the name of the Developer. Based on the foregoing representations, you now request clarification on the tax implication relative to the assignment of the saleable lots pursuant to the above-mentioned JVA as to whether it is not subject to income tax/creditable withholding tax, capital gains tax and the corresponding 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 Joint Venture Agreement entered into by the above-named Owner and Developer, for the development of the aforesaid property into a residential subdivision is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997. Moreover, the transfer of the property by the Owner to the Developer pursuant to their JVA is not subject to the capital gains tax and to the documentary stamp tax under Sections 24(D)(1) and 196 of the Tax Code of 1997. However, the certification is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the said Code. However, the co-venturers are separately subject to the regular individual and corporate income taxes on their respective taxable income during each taxable year derived by them from the aforesaid construction project. Moreover, the Joint Venture Agreement entered into by and between the Owner and Developer is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the Tax Code of 1997. However, the sale of the said real property shall be subject to the documentary stamp tax under Section 196 of the said Code. Moreover, the allocation and distribution of their respective shares consisting of developed lots and the housing structures built thereon 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, 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) TEHIaA Furthermore, since the partition to be executed by the parties allocating and distributing between them 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 above-named Owner and the Developer, the same is not subject to the value-added tax, income/creditable withholding tax nor to the documentary stamp tax respectively imposed under Sections 106, 24(c), 27(A) as implemented by Revenue Regulations No. 2-98, as amended and 196 all of the Tax Code of 1997. However, the sale of the respective share of the Owner and/or the Developer of the aforesaid property shall be subject to the creditable withholding tax, VAT and documentary stamp tax pursuant to Revenue Regulations No. 2-98, as amended, Sections 106(A) and 196 all of the Tax Code of 1997. 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