BIR Ruling [DA-577-06]

September 22, 2006 BIR RULING [DA-577-06] 22 (B); DA-192-2001 Pasda, Inc . San Sebastian Village Tarlac City Attention: Mr. Alex Pascual Corporate Accountant Gentlemen : This refers to your letter dated July 27, 2006 stating that Pasda, Inc. entered into a joint venture arrangement with Hausland Development Corporation (hereinafter, Hausland) for the development of a residential subdivision located at Brgy. Burot, Tarlac City, and that you now request for a confirmation of your opinion that: 1. The terms of your Agreement do not give rise to a separate taxable joint venture pursuant to Section 22(B) of the Tax Code of 1997; and 2. The allocation and distribution of saleable lots to Pasda, Inc. and Hausland in the project pursuant to their joint undertaking and the execution of the Partition Agreement to implement the allocation of saleable lots are not taxable events and therefore are not subject to income/creditable withholding tax, value added tax and documentary stamp tax. It appears that Pasda, Inc. is the registered owner of several parcels of land located at Brgy. Burot, Tarlac City with a total area of 153,490 square meters, more or less, presently covered by Transfer Certificates of Title (TCT) issued by the Register of Deeds for Tarlac, namely: TCT Nos. 139309, 139310, 380754, 380755, 380756, 380757, 312589, 381716, 380863, 380864, 380865, 380866, 380867, 316161 and 64814 (the "Properties"). Hausland, on the other hand, is an entity which will finance and develop the Properties into a residential subdivision with a commercial strip (the "Project") to be known as Tuscany North Estates. HAcaCS On June 24, 2006, Pasda, Inc. and Hausland entered into a Development Agreement whereby they agreed to develop the Properties. The capital contributions of the said parties to the joint undertaking are as follows: (a) Pasda, Inc. shall contribute the properties for the Project; (b) Hausland shall develop the properties by financing, planning designing, marketing, construction, management and general operation of all the facets of the Project; After the development of the Project, the parties will receive the following as a return of their investment, Hausland will receive 60% of the saleable lots while Pasda, Inc. will receive 40%. Said distribution shall be implemented through a fair allocation of lots in accordance with the Partition Agreement and the same shall be registered in the name of the parties. In reply, please be informed as follows: 1. Pursuant to Section 220(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. 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 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 entered into by and between Pasda, Inc. and Hausland is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. 2. The allocation and distribution of saleable lots of the Project between Pasda, Inc. and Hausland in consideration of their respective contributions, as stipulated in their Agreement is not a taxable event and is not subject to income tax or any withholding tax because the allocation is a mere return of capital that each has contributed. (BIR Ruling No. DA-192-2001 dated October 17, 2001) The transfer is also not subject to VAT since under Section 105 of the Tax Code of 1997, as amended, 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, as amended. Hence, by contributing its parcels of land, Pasda, Inc. neither sells, barters, exchanges goods, property nor renders services to be subject to VAT, as amended. (BIR Ruling No. DA-240-2001 dated November 16, 2001) EcSCHD The Partition Agreement whereby Pasda, Inc. and Hausland will allocate unto each other their shares in the net 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, as amended, income tax and any withholding tax because the allocation is made without monetary consideration and is not in connection with a sale. The partition is made merely to segregate the saleable area between the parties, as the return of the capital which each has contributed. However, the acknowledgment to said Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997, as amended. It is understood however, that upon 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 27(D)(5), 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, as amended, 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. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service