BIR Ruling [DA-434-06]

July 19, 2006 BIR RULING [DA-434-06] 22 (B); DA-192-2001 Qualey Properties, Inc. 2/F Leyson Bldg., D. Jakosalem St. Cebu City Attention: Mr. Gerard L. Qua Authorized Representative Gentlemen : This refers to your letter dated June 25, 2006 requesting for an exemption from the payment of income tax, capital gains tax and documentary stamp tax relative to a Joint Venture Agreement. (JVA) entered into by and among Messrs. Gerald L. Qua, Patrick L. Qua and Martin L. Qua with Marvel Communities Management, Inc. and Qualey Properties, Inc. aICHEc It appears that Messrs. Gerald L. Qua, Patrick L. Qua and Martin L. Qua (Owners) are the absolute and legal owners of two (2) parcels of land located at Good Shepherd Road, Barangay Guadalupe, Cebu City and covered by Transfer Certificates of Title (TCT) Nos. 118268 and 123633 containing an area of 1,500 sq.m. and 3,850 sq.m., respectively, while Marvel Communities Management, Inc. and Qualey Properties, Inc. (Developers) are domestic corporations duly organized under the laws of the Philippines and are engaged in the business of land development, conversion of raw land into residential subdivision and construction of houses; and that the aforesaid parties have entered into a JVA on March 8, 2006, whereby Messrs. Gerard L. Qua, Patrick L. Qua and Martin L. Qua will contribute their landholdings for the development into a residential subdivision which will be undertaken by Marvel Communities Management, Inc. and Qualey Properties, Inc. The basic terms of the said JVA are as follows: 1. That the developers shall provide all the requisite funds, equipment, materials, supplies, development works, expertise, management, labor and supervision necessary for the successful completion of the Project. 2. That from the net saleable lots, the developers and property owners have agreed to the sharing which will constitute their respective shares, as follows: Name Ratio Marvel Communities Management, Inc. 10% Qualey Properties, Inc. 50% Property Owners 40% Total 100% 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. 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 among the Owners and the Developers is not subject to income tax under Section 27 of the Tax Code of 1997. The assignment by the Owners to the Developers of their corresponding shares of the resulting net saleable 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 Partition whereby the Owners and the Developers will allocate unto each other their shares in the net saleable lots, 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. 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. HAICET Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service