BIR Ruling [DA-491-05]

December 6, 2005 BIR RULING [DA-491-05] 22 (B); DA-192-2001 Atty. Victor C. Reyes c/o Jamaica Realty and Marketing Corporation 101 Aguirre Avenue, B.F. Homes Paraaque City S i r : This refers to your letter dated October 24, 2005 requesting on behalf of your client, Jamaica Realty and Marketing Corporation (Jamaica),for a ruling on the tax implication of a joint venture agreement it had executed with Roquimar Jhon T. Obiedo, Roseanne T. Obiedo and Spouses Roberto and Rosemarie Obiedo (Landowners) for the development of the latter's properties located at Barrio del Rosario, Naga City. It appears that the Landowners, all residents of Naga City are the registered co-owners of two (2) parcels of land containing an area of seventy two thousand six hundred forty seven (72,647) square meters, more or less, covered by Transfer Certificates of Title (TCT) Nos. T-29289 and T-32482 of the Registry of Deeds for Naga City, and that, on the other hand, Jamaica, the Developer, is a corporation duly organized and existing under and by virtue of the laws of the Philippines which is duly represented by its Chairman of the Board, Jaime B. Biana. Both have entered into a joint venture agreement on February 11, 2000, whereby they expressly stipulated that the Landowners shall deliver the possession and occupancy of their lots and shall convey to Jamaica their properties, which the latter will develop into a residential subdivision. After the residential subdivision is completed, ownership of certain lots will be apportioned to them as their share in such joint venture undertaking. From the aforestated agreement, it is reflected that the parties have pooled their respective resources to put up a residential subdivision project and after its completion, the Landowners are entitled to their share of forty percent (40%) of the net saleable area in the subdivision and Jamaica will be entitled to sixty percent (60%) thereof. As a result, after the completion of the subdivision project known as the Jardin Real de Naga Subdivision Phase III, the TCTs of one hundred sixteen (116) parcels of land with an aggregate area of twenty eight thousand seventy five (28,075) square meters, more or less, and designated roads, alleys and open spaces consisting of sixteen (16) lots with an aggregate area of twenty three thousand two hundred seventy two (23,272) square meters, being part of TCT Nos. T-29289 and T-32482 will be issued in the name of Jamaica. Based on the foregoing, you now would like to request for a ruling to confirm your opinion that: 1. The joint venture between the Landowners and Jamaica for the construction of the subdivision project 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; and 2. The allocation of subdivision lots and the issuance of the corresponding TCTs by the Registry of Deeds of Naga City to the Landowners and Jamaica, representing their respective shares or participating interest in the project as stipulated in the joint venture agreement are not taxable events, therefore, not subject to income and/or expanded withholding tax, because it is only upon sale or disposition of the lots allocated to the Landowners and Jamaica to third parties that the gain realized by the parties in the said transaction will be subject to the regular income tax under Section 27(A) of the Tax Code of 1997 and to the expanded withholding tax under Revenue Regulations (RR) No. 6-85, as amended by RR No. 2-98. cTIESD In reply, please be informed that: 1. Pursuant to Section 22(B) of the Tax Code of 1997, the term "corporation" includes 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. P.D. No. 929 amended the definition of the taxable corporation so 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 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 the Landowners and Jamaica is not subject to income tax under Section 27 of the Tax Code of 1997. The assignment by the Landowners and Jamaica of their corresponding share of the resultant subdivision lots in the aforesaid project is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax, because the aforestated assignment is a mere return of capital contribution, and therefore not a taxable event. (BIR Ruling No. DA-192-2001 dated October 17, 2001) The Deed of Assignment whereby the Landowners and Jamaica will allocate unto each other their shares in the resultant subdivision lots, 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 resultant lots between the parties, as the return of the capital which each has contributed. However, the acknowledgement to said Deed of Assignment 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 Landowners, 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) 2. It is understood however, that upon the 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. TEDHaA This ruling is being issued on the basis of 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service