BIR Ruling [DA-424-03]

November 21, 2003 BIR RULING [DA-424-03] 22 (B) DA-240-2001 Maribel Pasco-Quejado, CPA 1034 Deli St., Crispin Village Dela Paz, Pasig City M a d a m : This refers to your letter dated October 2, 2003 stating that sometime in 1994 Quezon Progressive Corporation, Efcel Estate Corporation, Bolmark Realty and Development Corporation, Edilberto L. de Mesa, Fernando L. de Mesa, Cecilda L. de Mesa, Owen de Mesa, Reynaldo de Mesa, Buenaventura Q. Lagar, Guillermo Q. Lagar, Avelino L. Lagar, Lauro L. Lagar and Arielito H. Idea (the Owners) entered into Joint Venture Agreements with Sta. Lucia Realty and Development, Inc. (Sta. Lucia for brevity) for the development of their 253,050 square meter properties all located at Brgy. Isabang, Lucena City into a residential estate, with a sharing of 45% of the net proceeds of the sale of the subdivision lots for the Owners and 55% for the developer; that in accordance with the above-mentioned joint venture agreements, Sta. Lucia has caused the development of the properties and the project is now in the process of segregation and transfer of the corresponding share of Sta. Lucia representing its 55% share of the project; that a Deed of Assignment and Memorandum of Sharing was likewise executed by the Owners transferring the aforesaid 55% share to Sta. Lucia; that you are now requesting for an opinion on the tax consequences of the above-quoted transactions, particularly: 1. What would be the taxes involved when the Owners will transfer to Sta. Lucia its 55% share of total saleable lots for its development works? Would there be capital gains and documentary stamp taxes (and if there is, how much?) when the parties eventually execute a Deed of Assignment or Memorandum of Sharing of the resultant lots in the project?;and 2. What would be the taxes involved when the parties eventually sell their respective share of saleable lots to third parties? 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. 29 amended the definition of the taxable corporation 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. cDTaSH 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 Sta. Lucia is not subject to income tax under Section 27 of the Tax Code of 1997. The assignment by the Owners to Sta. Lucia 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 Deed of Assignment and Memorandum of Sharing whereby the Owners and Sta. Lucia will allocate unto each other their share 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 Assignment and Memorandum of Sharing 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 parcels of land, the Owner, neither sells, barters, exchanges goods, property nor renders 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), 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 properties, 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 null and void. TIHCcA Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service