BIR Ruling [DA-522-04]

October 8, 2004 BIR RULING [DA-522-04] Casimiro Development Corporation 2nd Floor Casimiro Building Alabang-Zapote Road, Zapote Las Pias City Attention: Mr. Teofilo P. Casimiro President Gentlemen : This refers to your letter dated October 1, 2004 stating that Felicitas R. Angeles is the absolute owner of a parcel of land located at Bacoor, Cavite covered by OCT No. (0-1462) RO-1193 issued by the Registry of Deeds for the Province of Cavite, containing an area of 37,917 square meters; that on the other hand, Casimiro Development Corporation (Developer) is a domestic corporation organized and existing under the laws of the Philippines; that the Owner wishes to develop the above-mentioned property into a low cost mass housing subdivision project; that the Developer having the facilities and technical know-how required by the owner will undertake the development and subdivision of the property under a joint venture agreement; that on March 6, 2003, a Joint Venture Agreement (JVA) was entered into by the Owner and the Developer whereby the latter will undertake to develop the above-mentioned property consisting of a gross area of 37,917 square meters into a low cost mass housing subdivision providing the following improvements and facilities: (a) all concrete roads, motor courts and alleys; (b) concrete curbs and gutters; (c) underground drainage system; (d) centralized water system; (e) centralized electrical system; (f) basic community facilities and that some of the special features of the JVA are as follows: (1) Upon approval of the subdivision plan by the Land Management Bureau, the Developer shall at its own expense, break the mother title into individual titles, twenty five percent (25%) to be placed in the name of the Owner as the Owner's share and seventy five percent (75%) in the name of the Developer as the Developer's share; (2) The Owner shall have the option to authorize the Developer to sell its share of salable lots to buyers in the project provided that the Developer shall be allowed to construct housing units on such lots and offer the same to buyers together with the lots of the Owner. In this regard, the Owner shall release periodically as required the corresponding titles in its name to the Developer for assigning or transfer of ownership to the respective buyers subject to full payment to the Owner of the agreed selling price of the corresponding salable lot/s less a marketing fee equivalent to 10% of the sales value; and (3) The individual titles of salable lots in the name of the Developer shall be under the custody of the Owner and shall be released to the Developer on a monthly basis pro rata to the percentage of actual and land development in place as undertaken by the Developer. Based on the foregoing representations, you now request confirmation of your opinion that the joint venture formed by the Owner and the Developer pursuant to their JVA is not subject to capital gains tax, value-added tax, income tax and documentary stamp tax. In reply thereto, please be informed that pursuant to Section 22(B) of the Tax Code of 1997, 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: (4) To assist them assist 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 holds that the JVA entered into by the Owner and Developer for the development and subdivision of the aforesaid property into a low cost massing housing project known as the West Bay Homes located at Barangay Daan-Bukid, Bacoor, Cavite is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997. Moreover, the transfer of the property by the Owner to the Developer pursuant to their JVA is not subject to the capital gains tax and to the documentary stamp tax under Sections 24(D)(1) and 196 of the Tax Code of 1997. However, the certification is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the said Code. cDTIAC However, the co-venturers are separately subject to the individual and corporate income taxes on their respective taxable income during each taxable year derived by them from the aforesaid construction project. Moreover, the JVA entered into by and between the Owner and Developer is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the Tax Code of 1997. However, the sale of the said real property shall be subject to the documentary stamp tax under Section 196 of the Code. Moreover, the allocation and distribution of their respective shares in the project consisting of developed lots and the housing structures built thereon in consideration of their respective contributions, as stipulated in the JVA 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 ) Furthermore, since the partition to be executed by the parties allocating and distributing between them their respective shares in the project in exchange for their respective contributions is without monetary consideration but merely acknowledges and confirms the title and ownership of the above-named Owner and the Developer, the same is not subject to the value-added tax, income/creditable withholding tax nor to the documentary stamp tax respectively imposed under Sections 106, 24(c), 27(A) as implemented by Revenue Regulations No. 2-98, as amended and 196 of the Tax Code of 1997. However, the sale of the respective share of the Owner and/or the Developer of the aforesaid property 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. Finally, this will authorize the Revenue District Officer (RDO) of the revenue district where the property is 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 above-named Owner and Developer based on their respective allocations pursuant to the partition without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax and value-added tax. DHACES 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service