BIR Ruling [DA-473-06]

August 4, 2006 BIR RULING [DA-473-06] Sec. 22 (B); DA-025-2006; DA-118-2004 Dante D. Torres & Co. CPA's 229, 2/F, Queensland Commercial Plaza Dolores, City of San Fernando, Pampanga Attention: Mr. Dante D. Torres Accountant Gentlemen : This refers to your letter dated July 31, 2006 stating that Jose Cesar O. Simpao, Elena G. Simpao, Christian G. Simpao, Mervin G. Simpao and Joel G. Simpao ("Owners") are the registered owners of eighteen (18) parcels of land situated at Pabanlag, Floridablanca, Pampanga, more particularly identified and described as follows: Title No. Lot No. Area OCT No. 8370 78 29,434 sq.m. OCT No. 8544 2656 30,123 sq.m. OCT No. 8930 2777 26,511 sq.m. OCT No. 8933 2778 26,511 sq.m. OCT No. 8934 2779 26,511 sq.m. OCT No. 8932 2780 26,514 sq.m. TCT No. 220990-R 139 239,996 sq.m. TCT No. 575261-R 170 76,805 sq.m. OCT No. 8543 2659 34,287 sq.m. OCT No. 8542 2661 39,892 sq.m. OCT No. 8935 2770 29,933 sq.m. OCT No. 8931 2769 29,933 sq.m. OCT No. 8369 128 45,272 sq.m. TCT No. 244232-R 130 136,095 sq.m. TCT No. 244232-R 545 5,169 sq.m. TCT No. 244232-R 548 22,150 sq.m. OCT No. 8371 132 22,656 sq.m. OCT No. 6113 549 39,452 sq.m. TOTAL 887,244 sq.m. that the Owners entered into a Joint Venture Development Agreement with JCO Simpao & Sons Corporation ("Developer"), on July 28, 2006, wherein the Owners obliged themselves to execute a Deed of Assignment conveying their above properties to the Developer as their contribution to the Joint Venture Project, that the Developer, on the other hand, will provide the technical know-how and finances for the execution of the project; that the agreed sharing is sixty percent (60%) for the Developer and forty percent (40%) for the Owners; and that based on the foregoing, you are requesting a ruling that the above transfer of properties is not subject to capital gains and documentary stamp taxes. In reply, please be informed that pursuant to Section 22(B) of the Tax Code of 1997, as amended, 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. It is to be emphasized, however, that P.D. 929 excluded joint venture formed for the purpose of undertaking construction projects from the definition of the term. "Corporation" because: (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. 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 Agreement entered into by the Owners and the Developer, for the development and subdivision of the aforementioned properties is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997, as amended. Moreover, the transfer of the above-mentioned properties by the Owners to the Developer pursuant to their Joint Venture Development Agreement is not subject to the capital gains tax and to the documentary stamp tax imposed, respectively, under Sections 24(D)(1) and 96 of the Tax Code of 1997, as amended. IaEACT However, the co-venturers are separately subject to the regular individual and corporate income taxes on their respective taxable income during each taxable year derived by them from the aforesaid construction project. Moreover, the Joint Venture Development Agreement and the Deed of Assignment entered into by and between Owners and the Developer are subject to the documentary stamp tax of P15.00 imposed under Section 188 of the Tax Code of 1997, as amended. Moreover, the allocation and distribution of the respective shares of the co-venturers in the project consisting of developed lots in consideration of their respective contributions, as stipulated in the Joint Venture Development 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. (BIR Ruling Nos. 10-96 dated January 23, 1996; DA065-97 dated February 10, 1997 DA286-98 dated June 29, 1998) However, the sale by the co-venturers of their respective shares in the project shall be subject to the creditable withholding tax, VAT and documentary stamp tax pursuant to Revenue Regulations No. 2-98, as amended, Sections 106(A) and 196 of the Tax Code of 1997, as amended. Finally, this will authorize the Revenue District Officer (RDO) of the revenue district where the properties are located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the transfer of the titles to the lots to be received by the Owners and the Developer based on their respective allocations pursuant to the Joint Venture Development Agreement without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax and value-added tax. (BIR Ruling No. DA-025-2006 dated January 31, 2006 citing DA-118-2004 dated March 16, 2004) 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service