BIR Ruling [DA-598-04]

November 25, 2004 BIR RULING [DA-598-04] 22 (B); DA-450-2004 Sta. Lucia Realty and Development, Inc. Archbishop Reyes Avenue Banilad, Cebu City Attention: Mr. Gerardo D. Quintos Finance Officer Gentlemen : This refers to your letter dated October 20, 2004, pertinent portion of which is quoted as follows: "Our corporation, Sta. Lucia Realty & Dev., Inc., a domestic corporation . . . entered into a Joint Venture Agreement with the following: Name of Joint Venture Partner % of Sharing Location of Property 1. Cesar Salimbangon/Mariqueta S. Yeung 55%-45% Consolacion, Cebu 2. Marciano M. Quirante 60%-40% Consolacion, Cebu 3. Rodolfo Jorolan 60%-40% Consolacion, Cebu 4. Victor Maglasang 60%-40% Consolacion, Cebu 5. Heidi Lopez, et al. 60%-40% Consolacion, Cebu 6. Crisostomo Maglasang 60%-40% Consolacion, Cebu 7. Fernando Velonta 60%-40% Consolacion, Cebu 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 the Joint Venture partner would contribute to the developer its real properties situated at Consolation, Cebu; 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; AIHDcC c) That the resultant saleable lots would be shared by each party 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 to 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." You now in effect request for a ruling that the assignment of the lots to Sta. Lucia Realty and Dev., Inc., pursuant to the Joint Venture Agreement is not subject to capital gains tax and documentary stamp tax. In reply, please be informed as follows: 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. 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. AaCEDS 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 among the afore-named landowners and Sta. Lucia Realty and Dev., Inc. is not subject to the regular corporate income tax under Section 27 (A) of the Tax Code of 1997. The allocation of saleable lots of the project between the landowners and Sta. Lucia Realty & Dev., Inc. in consideration of their respective contributions, 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 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, 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 their parcels of land, the landowners neither sell, barter, exchange goods, properties nor render services 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) The Sharing Agreement whereby the landowners and Sta. Lucia Realty & Dev., Inc. 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, 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 areas between the parties, as return of the capital which each has contributed. However; the acknowledgment to said Sharing Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. 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 24 (D) (1), 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, 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. AIcaDC 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 will be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service