BIR Ruling [DA-429-05]

October 20, 2005 BIR RULING [DA-429-05] 22 (B); DA013-05 Woodridge Properties, Inc . 7th Floor, Alabang Business Tower 1216 Acadia Avenue, Madrigal Business Park Ayala Alabang, Muntinlupa City Attention: Mr. Ernesto T. Matugas President Gentlemen : This refers to your letter dated September 1, 2005 stating that Ms. Florencia P. Tiongson (Landowner) is the absolute and registered owner of two (2) parcels of land covered by TCT Nos. T-203873 and 260226 containing an aggregate area of 20,793 square meters located, at Bo. Molino, Municipality of Bacoor, Province of Cavite; that the Landowner desires to develop the aforesaid parcels of land into a residential area with all the appurtenant amenities and facilities; that on the other hand, Woodridge Properties, Inc. (Developer),is a corporation duly organized and existing under the laws of the Philippines; that the Developer is a duly licensed development and realty company, with technical and financial capability to develop the property and having been fully convinced of the sincerity of the Landowner's intention to have the aforesaid property developed; that on May 21, 2003, a Joint Venture Agreement (JVA) was entered into by and between the Landowner and Developer whereby the latter undertakes to develop and convert the project into a residential property; and that the salient features of the JVA are as follows: 1) The parties agree that the relationship between them is not that of a partnership but that of a joint venture. They specifically agree, therefore, that for and in consideration of the subdivision and development works that will be performed by the Developer on the Project, the Landowner shall compensate the Developer in the form of resultant subdivision lots in the Project equivalent to fifty percent (50%) of the total net salable area after deducting the allocation for roads and alleys, open spaces, community facilities, creek lots and easement of any kind; and 2) The remaining fifty percent (50%) shall accrue to the Landowner. Based on the foregoing representations, you now request confirmation of your opinion that the JVA entered into by the Landowner and Developer is not subject to any tax pursuant to Sections 22(B) of the Tax Code of 1997. In reply thereto, please be informed that your opinion is hereby confirmed as follows: 1. Section 22(B) of the Tax Code of 1997 provides that the term "corporation" includes partnership, no matter how created or organized, joint stock companies, joint accounts ( cuentas en participacion ),associations of 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. aEHTSc It is to be emphasized, however, that P.D. 929 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 an additional income tax lien. 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 and between the Landowner and Developer is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997 and is not required to file quarterly and final or adjustment/income tax returns. However, the co-venturers are separately subject to the regular corporate/individual income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. 2. The allocation and distribution of their respective shares in the Project in consideration for their respective contributions to the said 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. Moreover, in the event that any party defer its right to receive a specific allocation to a later phase of the project for as long as such allocation constitutes part of the total return of its capital, such deferment is still not subject to the aforementioned taxes. However, 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 No. 2-98, as amended by Revenue Regulations Nos. 6-2000 and 12-2000. In addition thereto, 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. (BIR Ruling No. DA-013-05 dated January 19, 2005) 3. The Deed of Partition to be executed by the parties whereby they will allocate and distribute among them their respective shares in the Project, in exchange for their respective contributions, being without monetary consideration is not subject to value-added tax, income/creditable and documentary stamp taxes. (BIR Ruling Nos. 207-92-dated July 16, 1992; 349-93 dated July 30, 1993; DA Ruling No. 025-95 dated January 11, 1995) IHTASa 4. The joint venture is subject to the 10% VAT as a contractor imposed under Section 108(A) of the Tax Code of 1997. (BIR Ruling Nos. DA 134-00 dated March 2, 2000; BIR Ruling No. 098-94 dated April 22, 1994) However, the transfer of the parcel of land by the Landowner to the Developer is 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 shall be subject to VAT imposed in Section 106 to 108, supra. Hence, by contributing its parcel of land, the Landowner neither sells, barters, exchanges goods, property nor renders services subject to VAT. (BIR Ruling No. DA013-05 dated January 19, 2005 citing BIR Ruling Nos. DA240-01 dated November 16, 2001; DA 115-01 dated September 5, 2001) 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