BIR Ruling [DA-595-99]

October 7, 1999 BIR RULING [DA-595-99] Swire Land Corporation Swire Corporate Center #14 N. Domingo Street Quezon City Attention: Mr . Jaime V . Guerrero Jr . President Gentlemen : This refers to your letter dated November 6, 1998 stating that you are a corporation duly organized and existing under the law of the Philippines and engaged in business as a real estate developer; that on March 25, 1996, you entered into a Memorandum of Agreement with Messrs. Jose Castellano Lapus, Ismael Castellano Lapus, Gerardo Castellano Lapus and Guillermo Castellano Lapus and Mesdames Pilar Lapus Suarez, Ma. Lourdes Castellano and Ma. Aurora Castellano Lapus (Owner) for the development and construction of a 36-storey high rise commercial/residential condominium building with basement parking (Project); that the property is situated along Annapolis Street, Greenhills, San Juan, Metro Manila, covered by TCT No. 3381-R containing an area of One Thousand One Hundred Thirty (1,130) square meters; that the basic terms of the Agreement are as follows: (a) that you as the developer shall provide all the requisite funds, equipment, materials, supplies, development works, expertise, management, labor and supervision necessary for the successful completion of the Project; that from the saleable area of the Project, you and the owner have agreed to share in the following proportion: 1) the owner shall be entitled to twenty-two (22%) percent of the total number of saleable area of the Project while you shall be entitled to the remaining seventy-eight (78%) thereof; 2) that the design of the condominium building to be adopted by you shall have a total saleable area of Twenty Three Thousand Six Hundred Thirty Six and 36/100 (23,636.36) square meters with an average selling price of Fifty Thousand Pesos (P50,000.00 per square meter; 3) that the share of the owner in the completed Project shall be equivalent to Twenty Two Percent (22%) of the aforesaid saleable area or a guaranteed minimum of Five Thousand Two Hundred (5,200) square meters and in the event that the saleable area exceeds 23,636.36 square meters, the owner shall be ten (10%) percent of the said excess saleable area, provided that in case the saleable area is below 23,363.63 square meters, the owner shall be entitled to the 5,200-square-meter share of the saleable area, the remaining seventy-eight percent (78%) shall pertain to you as your salary; and that in the event that the saleable area exceeds 23.363.63 square meters; your share shall be ninety percent (90%) of the said excess saleable area. In connection therewith, you are now requesting for a ruling to the effect that the designation of the condominium units as your share and that of the owner in the project is exempt from the payment of capital gains tax and documentary stamp tax. 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 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. 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; (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 Memorandum of Agreement entered into by and between you and the owner for the construction of the Project is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997. The allocation of condominium units between you and the owner, as stipulated in the joint venture 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 of you have contributed. However upon the subsequent disposition by the co-venturers of the condominium units allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax under Sections 24 and 27(A) of the Tax Code of 1997 and to the creditable withholding tax under Revenue Regulations No. 2-98. (BIR Ruling No. DA-286-98 dated June 29, 1998) The said sale of the condominium units shall also be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. llcd Moreover, the partition agreement whereby you and the owner will allocate your respective share in the saleable lots in consideration of your 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. Furthermore, Section 185 of the Revised Documentary Stamp Tax Regulations (Regulations No. 26) provides that "conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable." Accordingly, since the partition agreement is without consideration and is not in connection with a sale, no income was generated and a fortiori, not creditable withholding tax and a documentary stamp tax are payable and collectible. However, the acknowledgment to said Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. DA-061-99 dated February 5, 1999) 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 will be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group