BIR Ruling [DA-451-04]

August 24, 2004 BIR RULING [DA-451-04] 22 (B) DA-240-2001 Atty . Julita Escueta-Gonzales 216 J. Gonzales St. Bian, Laguna Gentlemen : This refers to your letter dated May 3, 2004 requesting for a ruling on the tax consequences of a joint venture agreement executed between your clients, Taga-Arce, Inc. and St. Francis Homes Development Corporation. It appears that Taga-Arce, Inc., a corporation duly organized and existing under the laws of the Philippines is the registered owner of two (2) parcels of land covered by Transfer Certificates of Title (TCT) Nos. T-257538 and T-444229 located at San Antonio, Bian, Laguna, while St. Francis Homes Development Corporation is likewise a corporation organized and established under Philippine laws purposely to convert and develop real properties acquired by it into a subdivision project. The directors and stockholders of the above-stated corporations are members of the same family. On October 24, 2003, St. Francis Homes Development Corporation has offered to develop the aforesaid parcels of land upon its consolidation with its adjoining lands. Taga-Arce, Inc. has accepted the offer and agreed to convey the 2 parcels of land in favor of St. Francis Homes Development Corporation for its consolidation and subdivision into six hundred ten (610) sublots all in the latter's name. Both parties have agreed that the certificates of title for the 610 sublots shall all be placed under the name of St. Francis Homes Development Corporation and shall equally share in the net saleable area of the individual subdivision lots. In reply, please be informed as follows: Pursuant to Section 22(B) of the Tax Code of 1997, the term corporation includes partnership, 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 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 is of the opinion as it hereby holds that the joint venture entered into by and between Taga-Arce, Inc. and St. Francis Homes Development Corporation is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. The allocation of saleable lots of the project between Taga-Arce, Inc. and St. Francis Homes Development Corporation, in consideration of their respective contributions, as stipulated in the Memorandum of Agreement is not a taxable event and is not subject to income tax or any withholding tax because the allocation is a mere return of capital that each has contributed. ( BIR Ruling No. DA-192-2001 dated October 17, 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 its parcel 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 ) The Partition Agreement whereby Taga-Arce, Inc. and St. Francis Homes Development Corporation 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, income tax and any withholding tax because the allocation is made without monetary consideration and is not in connection with a sale. The partition is made merely to segregate the saleable area between the parties, as the return of the capital which each has contributed. However, the acknowledgment to said Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. It is understood however, that upon 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. aIAEcD 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 will be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service