BIR Ruling [DA-477-04]

September 10, 2004 BIR RULING [DA-477-04] Section 22 (B) DA-561-99 & DA-027-2002 Ms. Anna Celestina R. Cruz, CPA #3-C Maliksi St., Piahan Quezon City M a d a m : This refers to your letter dated August 16, 2004 requesting on behalf of your clients, Victoria Panlilio Luciano, Aurelia Panlilio Luciano-Liwag, Jose Panlilio Luciano, Teresita Panlilio, Augusto P. Luciano, Jr., Maria Teresita Panlilio Luciano, Concepcion Panlilio Luciano-Pennington, and Rita Panlilio Luciano-Kubelick ("Luciano Family"), for a ruling on the tax consequences of the joint venture agreement entered by and between your clients and Sta. Lucia Realty & Development, Inc. ("Sta. Lucia"), more particularly: 1) What would be the taxes involved when your clients transfer to Sta. Lucia its 55% share of the total saleable lots for its development of the project? Would there be capital gains and documentary stamp taxes (and if there is, how much) when the parties eventually execute a Deed of Assignment for the resultant lots in the project? 2) What would be the taxes involved when the parties eventually sell their respective share of saleable lots to third parties? It is represented that Sta. Lucia is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with office situated at the Ground Floor, State Financing Center Bldg., Ortigas Avenue, Mandaluyong, Metro Manila; that sometime in 2003, your clients (the Owners) entered into a joint venture agreement (JVA) with Sta. Lucia (the Developer) for the construction and development of a commercial subdivision (the Project) located in the Bo. of Del Carmen, Municipality of San Fernando, Province of Pampanga with an area of 201,808 square meters; that in accordance with the JVA, the Developer has caused the development of the properties and the Project is now in the process of segregation and transfer of the corresponding share of the Developer in the resultant titles representing its 55% of the Project from the Owners; that a Deed of Assignment was already executed to transfer the 55% (from the Owners) share of the Developer, Sta. Lucia in the resultant subdivision lots; and that the JVA provides for the following terms and conditions: 1. The Owners will contribute to the Project several parcels of land, covered by Transfer Certificate of Title No. T-415284-R, with an aggregate area of 201,808 square meters, more or less, all of which are located in the Bo. of Del Carmen, Municipality of San Fernando, Province of Pampanga. 2. All expenses for materials, improvements, labor and services necessary and adequate for the good, prompt, faithful development of the property as a first class commercial subdivision, the development of the necessary right of way, shall be for the Developer's account, including all expenses for the procurement of necessary licenses/permits from the government agencies concerned. 3. The proportionate interest of each party shall be determined by their respective participation in the project with an agreed sharing of 45% for the Owner and 55% for the Developer. 4. All taxes and fees shall be borne by the parties in proportion to their sharing scheme (55%45%). In the case of reserved lots, taxes due thereon shall be borne by the party owning such reserved lots. In reply, please be informed as follows: 1) 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 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. IATSHE Such being the case, the joint venture formed as a result of the JVA by and between the Owners (Luciano Family) and the Developer (Sta. Lucia) for the construction and development of a commercial subdivision is not subject to the corporate income tax under Section 27(A) 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 construction Project. Considering the foregoing, the joint venture of Luciano Family and Sta. Lucia for the construction and development of a commercial subdivision will not create a taxable joint venture within the meaning of Section 22(B), in relation to Section 27(A) of the Tax Code of 1997. 2) The allocation between Luciano Family and Sta. Lucia of their respective share or participating interests in the Project, as stipulated in the JVA, is not a taxable event and is not subject to income, withholding, value-added and documentary stamp taxes, because the allocation is a mere return of the capital that each has contributed to the Project. 3) It is only upon sale or disposition of the shares allocated to Luciano Family and Sta. Lucia to third parties that the gain realized by the parties in the said transaction will be subject to the regular 33% income tax under Section 27(A) of the Tax Code of 1997, the creditable withholding tax under Revenue Regulations No. 2-98, as amended and the value-added tax under Section 106 of the Tax Code of 1997. The transfer of the said properties to third parties shall likewise be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 based on the consideration or the fair market value of the property being transferred, whichever is higher. IaEASH 4) Section 185 of the Revised Documentary Stamp Tax (DST) Regulations No. 26 provides that "conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable." Accordingly, since the aforementioned Deed of Assignment is without' consideration and not in connection with a sale made to Luciano Family and Sta. Lucia, respectively, no income was generated and a fortiori , no income, creditable withholding, value-added and documentary taxes are payable and collectible. However, the acknowledgment to said Deed of Assignment is subject to DST of P15.00 pursuant to Section 188 of the Tax Code of 1997. In view thereof, the Deed of Assignment to be executed by Luciano Family and Sta. Lucia whereby Luciano Family and Sta. Lucia allocate unto each other their respective shares in the Project, in consideration of their respective contributions in the Project, considering that the Deed of Assignment is without monetary consideration, will not be subject to income, withholding, value-added and documentary stamp taxes under Section 196 of the Tax Code of 1997. 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, and/or any of the requirements set forth in this letter are not complied with, then this ruling shall be considered null and void (BIR Ruling No. DA-561-99 dated September 29, 1999 and BIR Ruling No. DA-027-2002 dated February 26, 2002) Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service