BIR Ruling [DA-624-04]

December 10, 2004 BIR RULING [DA-624-04] Sec. 22 (B), 27 (A) & 196 of the NIRC; P.D. 929 DA-047-2004 Pacis & Reyes Attorneys-at-Law 8/F, Chatham House 116 Valero corner V.A. Rufino Sts. Salcedo Village, Makati City 1227 Attention: Atty. Maria Resa S. Celiz Gentlemen : This refers to your letter dated November 4, 2004, in behalf of your client, G&W Architects, Engineers and Project Development Consultants, a partnership duly organized and existing under and by virtue of the laws of the Republic of the Philippines (hereinafter, GW or Trustee ), requesting for exemption from capital gains tax under Section 27(D) of the 1997 Tax Code and the documentary stamp tax on deeds of sale and conveyance of real property imposed under Section 196 also of the same Code. The facts as you represented, are quoted as follows: "1. A group of individuals (hereinafter, the Clients ) undertook to participate in the collective development of a residential condominium project known as Kensington Place Condominium (the Project ) to be built on a parcel of land presently covered by Transfer Certificate of Title No. 35849 of the Registry of Deeds for Taguig (the Subject Land ). The Clients hired GW to act as project manager. "2. To begin the Project, each Client entered into a Contract to Manage and Execute the Construction of Kensington Place Condominium (the Contract ). In said Contract, each Client undertook to collectively develop the Project and to put up his/her respective construction funding contributions for the same. In return for such participation and as part of his/her interest in the Project, each Client was assigned specific condominium units and parking units in the Project (the Condominium Units and Parking Units ). In addition, each Client was to have a proportionate undivided interest in the common areas of the Project, which common areas includes the Subject Land (the Common Areas ). "3. For its part, GW was given a mandate to manage and execute the development of the Project and in connection thereto, to execute acts in behalf of and for the collective benefit of the Clients. GW, however, did not and does not assume the role of developer and hence has not made any representation that it is, in its own capacity, selling the units comprising the Project. . . . "4. Under the terms of the Contract, each Client agreed that prior to the actual division of the Project into individual units, their respective interests in the Project would consist in a pro-indiviso , pro-rata share, held collectively with the other Clients. Realizing, however, that it would be cumbersome and administratively difficult for all the Clients to be named as owners of the Subject Land and the Project, the Clients appointed GW, as Trustee, for the purpose of allowing the Trustee to hold title to the Subject Land and the Project. GW was thus instructed under the Contracts, to purchase and hold title to the Subject Land for the collective benefit of the Clients and in proportion to their respective interests in the Project. . . . "5. To facilitate the collection and allocation of construction funding payments from the Clients to the Project's suppliers and service contractors, separate Depository and Disbursing Agreements (hereinafter, the Disbursing Agreements ) were executed by each Client with the Banco de Oro Universal Bank Trust Banking Group (the Bank ). "6. At the same time that the Trustors executed the Disbursing Agreements, their respective initial construction funding payments were remitted to the Bank with the instructions for the Bank to disburse the funds, among others, for the necessary payments in connection with the construction and development of the Project and the purchase of the land where the Project will be situated, in accordance with the instruction of the Trustee. Moreover, the Bank was instructed to hold and disburse the funds as and when necessary for the development of the Project using the Clients' additional construction funding payments. . . . "7. In accordance with such directions, the Trustee then purchased the Subject Land. . . "8. As part of its function, GW is mandated to effect the condominiumization of the Project and obtain necessary registrations for the same and the individual Condominium Certificates of Title for the Condominium and Parking Units and the Common Areas. Finally, under the terms of the Contract, upon completion of the Project, the Trustee is to execute deeds conveying in favor of the Clients their respective Condominium and Parking Units and the Common Areas in favor of a Condominium Corporation." On the basis of the aforementioned facts, you are requesting for a confirmation that: 1. The conveyance of the Condominium Units and Parking Units by the Trustee to the individual Trustors is not subject to any tax imposed under the 1997 Tax Code and the documentary stamp tax on deeds of sale and conveyance of real property imposed under Section 196 of the same Code; and 2. The conveyance of the common areas of the Project by the Trustee to the Condominium Corporation is not subject to any tax imposed under the Tax Code of 1997 and the documentary stamp tax imposed under Section 196 of the same Code. In reply, please be informed as follows: Pursuant to Section 22(B) of the Tax Code of 1997, the term corporation includes 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. 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 joint venture entered into by and between the Clients is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. 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 Clients, neither sells, barters, exchanges 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 partition agreement whereby the Clients will allocate unto each other their share 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, 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. Moreover, the conveyance of condominium units by the Trustee to the individual Trustors pursuant to the terms of the Contract is a conveyance without consideration, the latter being the beneficial party and/or real owner of the condominium units, while the Trustee merely holds legal title thereto. Being a conveyance without consideration, the transaction will not be subject to any tax imposed under the 1997 Tax Code. Neither is it subject to the documentary stamp tax imposed under Section 196 of the same Code. However, the acknowledgement to said partition agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling Nos. 116-91, 123-91, 125-93, 128-93, DA-662-11-29-99). Likewise, the conveyance of the Common Areas of the Project by the Trustee to the Condominium Corporation is not subject to capital gains tax and documentary stamp tax under Section 196 of the same Tax Code, for the reason that the same is without consideration since no income therefrom is generated by the Trustee. Further, said conveyance is made simply to comply with the requirements of the Condominium Act and for the management of the Project for the common benefit of the unit owners, building stands and the common areas and appurtenances of said condominium building. Hence, no capital gains tax or creditable withholding tax is payable and collectible. Instead, only the documentary stamp tax on certificates in the amount of P15.00 imposed under Section 188 of the Tax Code of 1997 shall be collected (BIR Ruling Nos. 176-91, 349-93, DA-662-11-29-99). DISEaC 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. 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. 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service