BIR Ruling [DA-450-04]

August 23, 2004 BIR RULING [DA-450-04] 22 (B), 27, 196 DA-083-99, DA-440-00, DA-219-02 JTKC Realty Corporation Rm. 502 JTKC Building 908 Zacateros cor. T. Alonzo Sts. Sta. Cruz, Manila Attention: Ms . Elizabeth T. David Gentlemen : This refers to your letter dated July 28, 2004, pertinent portion of which is quoted as follows: "JTKC REALTY CORPORATION (JTKCRC) is a corporation organized and existing under and by virtue of the laws of the Philippines, with principal offices at Rm. 507 EBC Building, Juan Luna Street, Binondo, Manila. "JTKC entered into a(n) Joint Venture Agreement . . . with JTKC LAND, INC. (JTKCLI) for the joint development of (a) 10-storey building erected on parcels of land with an aggregate area of 1,619.80 square meters, more or less. Pursuant to the JVA as amended, the parties agreed among others as follows: a) JTKCRC will contribute the parcels of land covered by Transfer Certificates of Title Nos. 9107564, 107565, 107566, 107567, 107568, 107569 and 107570 with a(n) aggregate area of 1,619.80 square meters, more or less, issued by the Register of Deeds of Manila and the building erected on the said parcels of land. JTKCLI, having the financial, technical and manpower resources, will undertake the conversion of the property into a condominium building, securing the License of Sell and other related documents, re-planning, design and introduction of the necessary improvements and installations to achieve its conversion and the marketing of the said Property. b) As a return of their investments and contribution(s), JTKCRC shall receive completed condominium units . . . while the remaining completed condominium and parking space units shall belong to JTKCLI as return of their contribution(s) in proportion to their investments in the joint venture project." (Emphasis supplied) Based on the foregoing, you now request for a confirmation of your opinion that: "1) The Joint Venture Agreement between JTKCRC and JTKCLI for the development of the Property will not create a taxable joint venture with the meaning of Section 22(B), in relation to Section 27(A) of the Tax Code of 1997. SDHITE "2) The allocation of units and the issuance of the Condominium Certificates of Titles by the Register of Deeds of Manila to JTKCRC and JTKCLI representing their respective share in the project under the joint venture agreement are not taxable events, therefore, not subject to income tax, expanded withholding tax, and value added tax because it is only upon the sale or disposition of the units allocated to parties that the gain realized by the parties in the said transaction will be subject to the regular 32% income tax under Section 27(A) of the Tax Code of` 1997 and the expanded withholding tax, as amended (BIR Ruling DA-018-99 & DA-488-98). The allocation of units is not also subject to value added tax and documentary stamp(s) tax." 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 participation ), 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 JTKCRC and JTKCLI 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. Considering the foregoing, the Joint Venture Agreement executed by JTKCRC and JTKCLI for the development of a 10-storey building, 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 JTKCRC and JTKCLI of their respective shares in consideration of their contributions 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 Agreement whereby JTKCRC and JTKCLI will allocate unto each other their share in the condominium units, 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 area between the parties, as the return of the capital which each has contributed. However, the acknowledgement to said 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) ECaTDc 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 JTKCRC and JTKCLI 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). Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service