BIR Ruling [DA-508-05]

December 16, 2005 BIR RULING [DA-508-05] Titan-Ikeda Construction & Development Corporation 15/F Washington Tower Asia Complex Paraaque City Attention: Ms. Mercedita C. Palmares Administrator Gentlemen : This refers to your letter dated November 22, 2005 stating that Philip G. Yao is the registered owner of a parcel of land located at 2043 Taft Avenue near corner Sen. Gil Puyat Avenue, Pasay City covered by TCT No. 134951 with a total area of 660 square meters; that Niczon G. Yao, Brando G. Yao, Hilda G. Yao, Paulino G. Yao and Philip G. Yao have equally contributed resources for the acquisition and purchase of said land and have agreed that said land be registered only in the name of Philip G. Yao, Landowners; that on the other hand, Titan-Ikeda Construction and Development Corporation is a domestic corporation duly registered with the Securities and Exchange Commission (SEC); that it is engaged in general construction and real estate development; that the Landowners and Developer have agreed to undertake in joint venture with each other the establishment of a condominium project known as the Titan Mansions on said parcel of land; that the salient features of the agreement is as follows: 1. The condominium building shall be at least twenty (20) storeys high; 2. The Landowners shall contribute the aforedescribed Land, purchased or acquired by them through their joint resources. Such Land is free from any lien or encumbrance. No other lien or encumbrance shall be annotated therein except with the written consent of the Landowners; 3. The exclusive ownership of the different floors including the completed units therein of the condominium building shall be divided and distributed to the parties as follows: 3.1.A A Share of the Landowner: Five (5) whole floors consisting of: a. The First Parking Floor from the ground counted as one (1) whole floor. cAaTED b. The Lower Ground Floor counted as one (1) whole floor. c. The Eight, Ninth and Tenth Floor counted as three (3) whole floors. The Eight Floor is included only as substitute in case the Lower Ground Floor will be deemed not feasible to be constructed and to be used as commercial area. d. The Upper Penthouse-A Floor (to be counted as one half floor, the other half being common areas such as swimming pool) and the Upper Penthouse-B Floor (to be counted as one half floor). The Upper Penthouse-A and Upper Penthouse-B Floors are to be counted together as one (1) Whole Floor. 3.1.B. Share of the Developer: The Whole and entire remaining floors and units not indicated above as belonging to the Landowner. that on November 24, 2005, a Deed of Assignment was executed by and between Titan Ikeda Construction and Development Corporation (Titan-Ikeda) and Visa Construk, Inc. (Visa); that Titan-Ikeda has failed to complete the development and construction of the proposed Titan Mansion condominium project, having satisfied only 18% of the total construction project owing to financial reverses and the poor economic condition affecting the local construction industry and real estate markets; that the Visa is confident of the feasibility and viability of the project and has expressed interest and formally proposed herein to take over the development and construction of the Titan Mansion project, which Titan-Ikeda has accepted; that Titan-Ikeda assigns and transfers all its rights, titles and interest covered under the joint venture agreement specifically mentioned as follows: 1. The Condominium Project known as Titan Mansions and its attendant Master Deed of Declaration may be changed and/or amended to another name subject however to applicable laws and policy guidelines as may be required by the proper government agencies; AIDcTE 2. The project shall be completed within the period prescribed under the renewed or revised Development Permits and/or License to Sell with the HLURB and/or applicable local city ordinances; 3. Pre-sold condominium units and/or any contracts of sale entered into by Titan-Ikeda shall be respected and assumed by Visa, Based on the foregoing representations, you now request confirmation of your opinion that the joint venture agreement entered into by Titan-Ikeda/Visa and Philip G. Yao is not subject to any tax pursuant to Sections 22(B) of the Tax Code of 1997. In reply thereto, please be informed that your opinion is hereby confirmed as follows: 1. Section 22(B) of the Tax Code of 1997 provides that 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 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 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 Agreement entered into by and among Philip G. Yao, et al. and Titan-Ikeda/Visa is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997 and is not required to file quarterly and final or adjustment/income tax returns. However, the co-venturers are separately subject to the regular corporate/individual income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. HTASIa 2. The allocation and distribution of their respective shares in the Titan Mansions in consideration for their respective contributions to the said 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. Moreover, in the event that any party defers its right to receive a specific allocation to a later phase of the project for as long as such allocation constitutes part of the total return of its capital, such deferment is still not subject to the aforementioned taxes. However, 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 No. 2-98, as amended by Revenue Regulations Nos. 6-2000 and 12-2000. In addition thereto, 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. ( BIR Ruling No. DA-013-05 dated January 19, 2005 ) 3. The Deeds of Partition to be executed by the parties whereby they will allocate and distribute among them their respective shares in the project, in exchange for their respective contributions, being without monetary consideration is not subject to value-added tax, income/creditable and documentary stamp taxes. ( BIR Ruling Nos. 207-92 dated July 16, 1992; 349-93 dated July 30, 1993; DA Ruling No. 025-95 dated January 11, 1995 ) 4. The joint venture is subject to the 10% VAT as a contractor imposed under Section 108(A) of the Tax Code of 1997. ( BIR Ruling Nos. DA134-00 dated March 2, 2000; BIR Ruling No. 098-94 dated April 22, 1994 ) However, the transfer of the parcel of land by Philip G. Yao et al. to Titan-Ikeda/Visa is not subject to VAT since udder 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 shall be subject to VAT imposed in Section 106 to 108, supra. Hence, by contributing its parcel of land, Philip G. Yao et al. neither sell, barter, exchange goods, property nor render services subject to VAT. ( BIR Ruling No. DA013-05 dated January 19, 2005 citing BIR Ruling Nos. DA240-01 dated November 16, 2001; DA115-01 dated September 5, 2001 ) EacHCD 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service