BIR Ruling [DA-395-06]

June 26, 2006 BIR RULING [DA-395-06] 22 (B); DA-192-2001 Homeowners Development Corporation 3rd Flr., Hernandez Bldg., 154 Katipunan Avenue St. Ignatius Village, Quezon City Attention: Mr. Jaime I. Hernandez President Gentlemen : This refers to your letter dated June 9, 2006 quoted as follows: "Homeowners Development Corporation (HDC) is a corporation duly organized and existing under Philippine Laws and is engaged in the development of real estate. Carlos P. Alberto, Heirs of Virgilio P. Alberto; namely Erlisa San Miguel, widow and children Ana Lisa Alberto Kreger, Cherry Alberto de Dios and Michael John S.M. Alberto, Alicia A. dela Serna, Arsenio Alberto Jr., Ester A. Estrella and Maria Belen A. Besid ("OWNERS") are owners of a parcel of land with an area of 21,688 square meters, more or less, located in the Barrio of Gitnang Bayan 1, Municipality of San Mateo Province of Rizal, to be registered under a new Transfer Certificate of Title from the original Transfer Certificate of Title No. 445501 of the Registry of Deeds of Marikina City Branch, containing an area of 21,688 square meters, more or less. On March 22, 2005, HDC and the OWNERS (collectively, the "Parties") entered into a Joint Venture Agreement (the "Agreement") for the joint development of a parcel land (herein referred to as the "Project"). The project consist of the planning, construction and development of the parcels into a residential subdivision, Birmingham Alberto located at Gitnang Bayan 1, San Mateo, Rizal, and the marketing and sale of developed lots located therein (saleable developed lots being referred to as "Developed Lots"). The specific terms of the Agreement as follows: 1. The Developer will shoulder the cost to develop the land. 2. The parties agreed on a partition of subdivision lots on a 55%-45% basis in favor of the Developer, part of which shall be registered in the name of the Developer while the remaining lots shall be titled in the name of the Landowners." You now request for a confirmation of your opinion that: 1. The Joint Venture whereby the OWNERS will contribute the land and HDC will shoulder the development cost and expenses of the entire Project does not give rise to a taxable joint venture, hence, is not subject to corporate income tax pursuant to Section 22(B) in relation to Section 27 (A) of the Tax Code. 2. The allocation and distribution of their respective shares in the Project consisting of the Developed Lots in consideration for their respective contribution to the Joint Venture is not a taxable event, hence, is not subject to the regular corporate income tax under Section 27(A) of the Tax Code, nor creditable withholding tax under Revenue Regulations No. 2-98, as amended, nor the value-added tax under Section 106 because the allocation is a mere return of capital that each of the parties has contributed to the Project. 3. The Deed of Partition to be executed by the Owners and HDC whereby they will allocate and distribute among themselves their respective shares in each phase of the Project in exchange for their respective contributions is without monetary consideration, hence, is not subject to value-added tax under Section 106 of the Tax Code, income/creditable withholding tax under Revenue Regulations No. 2-98, as amended, and the documentary stamp tax under Section 196 of the Tax Code. DCHIAS 4. Consequently, the confirmation of this request will authorize the Revenue District Officer (RDO) of the revenue district where the land is located to issue the corresponding Tax Clearance Certificate with regard to the transfer of the developed lots to the Owners and HDC based on their respective allocations without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax and value-added tax. In reply, please be informed that: 1. 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 the Owners and HDC is not subject to income tax under Section 27 of the Tax Code of 1997. 2. The assignment by the Owners 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) 3. The Deed of Partition whereby the Owners and the Developer 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 Deed of Partition 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 their parcel of land, the Owners, neither sell, barter, exchange 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 Sections 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. 4. This will authorize the Revenue District Officer (RDO) of the revenue district where the land is located to issue the corresponding Tax Clearance Certificate with regard to the transfer of the Developed Lots to the co-venturers based on their respective allocations without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax and value-added tax. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service