BIR Ruling [DA-421-06]

July 11, 2006 BIR RULING [DA-421-06] 22 (B); DA 286-98 Martinez, Santos, Villena & Bargas Circumferential Road corner F. Manalo Street Antipolo City Attention: Atty . Mark B . S . Santos Gentlemen : This refers to your letter dated June 15, 2006 stating that your client, J.S. Cruz Construction and Development Corporation (Cruzcon), is a corporation organized and existing under the laws of the Philippines; that on the other hand, Samahang Cofradia de Taytay, Inc. (Cofradia) is also a corporation organized and existing under the laws of the Philippines; that on May 3, 2006, Cruzcon and Cofradia entered into a Joint Venture Agreement (JVA) for the development of the latter's parcel of land covered by Original Certificate of Title (OCT) No. 9067 issued by the Registry of Deeds for the Province of Rizal into a residential subdivision which shall form part of the Manila East Homes in Taytay, Rizal; that it was agreed, among others, that as the developer Cruzcon shall introduce improvements thereon by developing the same into a residential subdivision; that as and by way of return of capital, the JVA stipulates that Cruzcon shall be entitled to sixty-five percent (65%) of the net saleable lots while the remaining thirty-five percent (35%) shall accrue to Cofradia; and that for this purpose, Cofradia has assigned in the same instrument to Cruzcon its 65% share of the net saleable lots. Based on the foregoing representations, you now request clarification as to whether or not the assignment of the saleable lots pursuant to the above-mentioned JVA is 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 participation ), 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 JVA 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. cECTaD 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 in the project consisting of developed lots and the housing structures built thereon in consideration of their respective contributions, as stipulated in the JVA 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 ) 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), as amended by Republic Act (R.A.) No. 9337 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service