Pacis & Reyes

July 26, 2007 BIR RULING [DA-410-07] 57 (B), 196, 106; DA-056-2003 Pacis & Reyes 8th Floor Chatham House 116 Valero corner V.A. Rufino Sts. Salcedo Village, Makati City Attention: Attys. Antonio C. Pacis and Ma. Resa S. Celiz Gentlemen : This refers to your letter dated July 3, 2007 requesting on behalf of your client, G & W Architects, Engineers and Project Development Consultants (GW for brevity), a professional partnership duly organized and existing under and by virtue of Philippine laws as a duly-licensed and accredited architectural firm, for a ruling that its conveyance of properties are exempt from capital gains tax/creditable withholding tax, documentary stamp tax (DST) and value-added tax (VAT) imposed under the 1997 Tax Code. The antecedent facts of your request are as follows: 1. A group of individuals (hereinafter, the "Clients") undertook to participate in the collective development of a residential condominium project known as the Sapphire Residences Condominium (hereinafter, the "Project") to be built on a parcel of land presently covered by Transfer Certificate of Title No. 35850 of the Registry of Deeds for the Province of Rizal (hereinafter, the "Subject Land''). The Clients hired GW to act as project manager. 2. To begin the Project, each Client entered into a Contract to Manage and Execute the Construction of the Sapphire Residences Condominium (hereinafter, the "Contract"). In said Contract, each Client undertook to collectively develop the Project and to put up his/her respective construction funding contributions for the same. In return for such participation and as part of his/her interest in the Project, each Client was assigned specific condominium units and parking units in the Project (the "Condominium Units and Parking Units''). In addition, each Client was to have a proportionate undivided interest in the common areas of the Project, which common areas includes the Subject Land (the "Common Areas"). ATaDHC 3. For its part, GW was given a mandate to manage and execute the development of the Project and in connection thereto, to execute acts in behalf of and for the collective benefit of the clients. GW, however, did not and does not assume the role of developer and hence has not made any representation that it is, in its own capacity, selling the units comprising the Project. 4. Under the terms of the Contract, each Client agreed that prior to the actual division of the Project into individual units, their respective interests in the Project would consist in a pro-indiviso, pro-rata share, held collectively with the other clients. Realizing, however, that it would be cumbersome and administratively difficult for all the clients to be named as owners of the Subject Land and the Project, the Contract also embodied a trust agreement whereby each client as Trustor appointed GW as Trustee, for the purpose of allowing the Trustee to hold title to the Subject Land and the Project. 5. To facilitate the collection and disbursement of construction funding payments from the clients to the Project's suppliers and service contractors, separate Depository and Disbursing Agreements (hereinafter, the "Disbursing Agreements'') were executed by each client with the Banco de Oro Universal Bank Trust Banking Group (hereinafter, the "Bank"). 6. At the same time that the Trustors executed the Contracts and the Disbursing Agreements, their respective initial construction funding payments were remitted to the Bank with instructions for the Bank to disburse the funds, among others, for the necessary payments in connection with the construction and development of the Project and the purchase of the Subject Land, in accordance with the instructions of the Trustee. 7. In accordance with the Contract, the Trustee then purchased the Subject Land for the collective benefit of the Clients. Moreover, the Bank was instructed to hold and disburse the funds as and when necessary for the development of the Project using the Clients' additional construction funding payments. 8. As part of its functions, GW is mandated to effect the condominiumization of the Project and obtaining necessary registrations for the same and the individual Condominium Certificates of Title for the Condominium and Parking Units and the Common Areas. Finally, under the terms of the Contract, upon completion of the Project, the Trustee is to execute deeds conveying in favor of the clients their respective Condominium and Parking Units and the Common Areas in favor of a Condominium Corporation. HCATEa On the basis of the aforementioned facts, you now request for a confirmation of opinion that: 1. The conveyance of the Condominium Units and Parking Units by the Trustee to the individual Trustors is not subject to any tax imposed under the 1997 Tax Code, including value-added tax, and DST on deeds of sale and conveyance of real property imposed under Section 196 of the same Tax Code, and 2. The conveyance of the common areas of the Project by the Trustees to the Condominium Corporation is not subject to any tax and the documentary stamp tax imposed under Section 196 of the same Code. In reply, please be informed that your opinion is hereby confirmed as follows: 1. The conveyance of the Condominium Units and Parking Units by the Trustee to the individual Trustors is without monetary consideration and does not have the effect of a sale, exchange or disposition and is merely confirmation of title in favor of the beneficial owners thereof. Accordingly, the transfer of the aforestated properties is not 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), nor to the 1.5% DST imposed under Section 196 both of the Tax Code of 1997 but is subject to the DST of P15.00 provided in Section 188 of the same Code. Since the conveyance is not a sale, barter or exchange of goods or properties, the same should not likewise be subject to the 12% VAT imposed under Section 106 of the same Tax Code, as amended. (BIR Ruling No. DA-056-2003 dated February 24, 2003) 2. The conveyance of the common areas of the Project by the Trustee in favor of the Condominium Corporation being without monetary consideration and not in connection with a sale made to the condominium corporation is not subject to income and/or creditable withholding tax. Since the said conveyance is not a sale, barter or exchange of goods or properties, the same is not likewise subject to the 12% VAT imposed under Section 106 of the Tax Code, as amended, neither will it be subject to the documentary stamp tax on sale or conveyance of real property imposed under Section 196 of the same Code. However, the notarial acknowledgment to said deed of conveyance is subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. DA-056-2003 dated February 24, 2003) DaCEIc 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