BIR Ruling [DA-507-04]

September 29, 2004 BIR RULING [DA-507-04] 22 (B), 27, 196 DA-083-99, DA-440-00, DA-219-02 Santa Lucia Realty & Development, Inc. G/F The Sentinel Condominium Gov. Manuel Cuenco Avenue Cebu City Attention: Mr. Gerardo D. Quintos Finance Officer Gentlemen : This refers to your letter dated July 12, 2004, the pertinent portion of which is quoted as follows: "Our corporation, Sta. Lucia Realty & Dev., Inc., a domestic corporation with branch office address at The Sentinel Condominium, Gov. Cuenco Avenue, Banilad, Cebu City entered into a Joint Venture Agreement with Aznar Brothers Realty Co. [AZBRO] &/or Aznar Enterprises, Inc., [AZENT] also a domestic corporation with office address at Villa Aznar Cmpd., Urgello St., Cebu City whereby the former would develop the real properties of the latter. "Among the terms and conditions of the Joint Venture Agreement, to wit: a) That AZBRO & AZENT would contribute to the Joint Venture its real properties situated at Bulacao, Cebu City; b) That Sta. Lucia Realty & Dev., Inc., would develop these real properties into a residential subdivision, all cost and expenses for the development would be at its sole account; c) That the resultant saleable lots would be shared by each in a 55%45% basis in favor of the developer; d) That each parties has the free control and dispositions in the sale of each share of the Joint Venture Agreement. "In order for the parties to completely exercise their respective rights to sell or dispose the lots as each share of the Joint Venture Agreement, it is necessary that titles to lots being the share of Sta. Lucia Realty & Dev., Inc., the developer, be transferred to its name. "Parties agree to execute the Sharing Agreement whereby the shares of the developer of the lots subject of the Joint Venture Agreement would be assigned and titles there transferred to and registered in the name of Sta. Lucia Realty & Dev., Inc. "Obviously neither parties derived any profit or gain from this transfer as it is only made to segregate or apportion between themselves their shares of the developed lots, pursuant to the Joint Venture Agreement." Perusal of the Joint Venture Agreement revealed that the properties covered by the project are the following: Area OCT/TCT/TD No. Lot No. (sq. m.) 353 18118 Part 32,459 251 18116 Part 10,802 38844 5316 Part 27,726 65605 5327 9,397 37444 5323 3,338 42395 5324 4,372 37445 5325 5,120 47357 5410 11,873 GR2K-12-076-00027 5320 13,663 04-16226 5326 3,574 04-19688 5329 3,320 GR2K-12-076-01165 5334-A 4,829 Based on the foregoing, you now in effect request for a ruling on the tax consequence of the foregoing transaction. 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 participacion ), 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 Sta. Lucia Realty & Dev., Inc. and AZBRO & AZENT 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 project. Considering the foregoing, the Joint Venture Agreement executed by Sta. Lucia Realty & Dev., Inc. and AZBRO & AZENT for the development of the combined land areas constituting the AZBRO land and the AZENT land into a residential subdivision, 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 Sta. Lucia Realty & Dev., Inc. and AZBRO & AZENT of their respective shares in consideration of their contribution 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 Joint Venture Agreement whereby Sta. Lucia Realty & Dev., Inc. and AZBRO & AZENT 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, because the allocation is made without monetary consideration and is not in connection with a sale. The allocation is made merely to segregate the saleable area between the parties, as the return of the capital which each has contributed. However, the acknowledgement to said Joint Venture 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) 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 Sta. Lucia Realty & Dev., Inc. and AZBRO & AZENT sell any of the portions allocated to them to third parties, the gain that may be realized by there 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. aAcHCT 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