BIR Ruling [DA-447-04]

August 23, 2004 BIR RULING [DA-447-04] 22 (B), 27, 196 DA-083-99, DA-440-00, DA-219-02 Ong, Ordoez and Associates 4th Floor, Miriam House Legaspi Street, Legaspi Village Makati City Gentlemen : This refers to your letter dated August 2, 2004, the pertinent portion of which is quoted as follows: "This has reference to the Joint Venture Agreement entered into by and between (among) Extraordinary Development Corporation (EDC), a corporation duly organized and existing under and by virtue of the laws of the Philippines, with offices at the 38th Floor, Orient Square Building, Emerald Avenue, Ortigas Center, Pasig City; and Earth Style Corporation (ESC), likewise a corporation duly organized and existing under and by virtue of the laws of the Philippines, with offices at the 37th Floor, Orient Square Building, Emerald Avenue, Ortigas Center, Pasig City. From the aforementioned agreement, it appears that EDC is the absolute and registered owner of four (4) parcels of land located in Bian, Laguna with an aggregate area of twenty seven thousand four hundred ninety four (27,494) square meters, more or less, covered by Transfer Certificates of Title Nos. T-527638; T-444853; and T-444854. Likewise, ESC is the absolute and registered owner of six (6) parcels of land located in Bian, Laguna with an aggregate area of Nineteen Thousand Two Hundred Fifty Eight (19,258) square meters, more or less, covered by Transfer Certificates of Title Nos. T-396079; T-402626; T-395373; and T-402116. EDC and ESC are jointly undertaking the development of the combined land areas constituting the EDC land and the ESC land (collectively referred to as the "Property") into a controlled and integrated residential community to be known as Villagio di Xavier , and in order to undertake the aforesaid development, EDC has agreed to contribute the EDC land, and ESC has agreed to contribute the ESC land, as well as to provide cash for the development of the Property (referred to as the "Project") and to distribute and allocate between themselves the components of the development corresponding to their respective interests in the Project. In pursuance of the foregoing, the parties have agreed to enter into an Agreement to set out their respective commitments and undertakings relating to the proposed business venture and the obligations of both parties under which the proposed venture will be implemented. CTaIHE As a return for their respective contributions to the Project, the Parties shall each receive a proportionate share in the Saleable Lots in the Project . EDC and ESC shall share 24:76 in the saleable lots in the Project. This sharing ratio may change depending on the approved Site Development Plan and such modified sharing ratio as agreed upon by the Parties in accordance with Procedure for Allocation stipulated in the Joint Venture Agreement, and when effected, shall become the final sharing ratio between the Parties." (Emphasis supplied) Based on the foregoing, you now in effect request for a ruling on the tax consequence of the foregoing transaction. In reply, please be informed that pursuant to Section 22(B) of the Tax Code of 1997, the term `corporation' shall include partnerships, no matter how created or organized, joint stock companies, joint accounts ( cuentas en participacion ), associations, or insurance companies, but does not include general or 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 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; and (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 between EDC and ESC is not subject to the corporate income tax under Section 27 of the Tax Code of 1997. However, the co-venturers are separately subject to the regular corporate income tax on their taxable income during each taxable year respectively derived by them from the aforesaid Project. CDAHaE Considering the foregoing, the Joint Venture Agreement executed by EDC and ESC for the development of the combined land areas constituting the EDC land and the ESC land into a controlled and integrated residential community to be known as Villagio di Xavier , and the allocation of their respective shares in the Project will not give rise to a separate taxable joint venture within the meaning of Section 22(B), in relation to Section 27(A) of the Tax Code of 1997, and that the allocation between EDC and EAC of their respective shares in consideration of their contribution in the Project, as stipulated in the Joint Venture Agreement, is not a taxable event and is not subject to income/withholding tax because the allocation is a mere return of the capital that each has contributed to the project. ( BIR Ruling No. DA-192-2001 dated October 17, 2001 ) The Joint Venture Agreement whereby EDC and ESC 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 Joint Venture Agreement 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 the parcels of land, the owners, neither sell, barter, exchange goods, properties nor render service 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 should EDC and ESC sell any of the portions allocated to them to third parties, the gain that may be realized by them from such sale effective January 1, 2000 will be subject to the regular corporate income tax under Section 27 of the Tax Code of 1997, and to the creditable/expanded withholding tax (EWT) under Revenue Regulations 2-98, as amended by Revenue Regulations Nos. 6-2001 and 12-2001 ( BIR Ruling No. 274-92 dated September 30, 1992; BIR Ruling No. UN-025-95 dated January 11, 1995; and BIR Ruling No. DA-488-98 dated November 16, 1998 ), and necessarily, the said transaction shall be subject to the documentary stamp tax imposed under Section 196 of the same Code, 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 based on 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. ( BIR Ruling No. 207-92 dated July 16, 1992; BIR Ruling No. 317-92 dated October 28, 1992 ). DHcESI Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service