BIR Ruling [DA-633-99]

November 11, 1999 BIR RULING [DA-633-99] Shoemart, Inc. 400 C. Palanca St. Quiapo, Manila Attention: Ms . Cecilia R . Patricio Assistant Vice-President Gentlemen : This refers to your letter dated July 22, 1999 requesting for a confirmation of your opinion that the conveyance of a certain portion of reclaimed land in Central Business Park-1 Island (CBP-1 Island A) by the Public Estate Authority (PEA) to Shoemart, Inc. pursuant to a joint venture development project undertaken by the two parties is not subject to income tax/withholding tax, value-added tax (VAT) and documentary stamp tax. llcd It appears that PEA is the registered owner of a parcel of reclaimed land located in Pasay City, otherwise known as the CBP-1 Island A, consisting approximately one hundred forty one (141) hectares, covered by Transfer Certificate of Title (TCT) No. 131537 issued by the Register of Deeds of Pasay City; that PEA wishes to cause the subdivision of this property into a mixed-use first-class recreational, institutional, office, commercial, residential and financial district area in accordance with the Manila-Cavite Coastal Road Reclamation Project (MCCRRP); that pursuant to the Agreement dated May 12, 1994 entered into by PEA, Shoemart, Inc. and the Philippine National Construction Corporation (PNCC), PEA agreed to form a joint venture with Shoemart, Inc. to fully develop CBP-1 Island A; and that a Joint Venture Agreement was executed on August 9, 1994, which embodies the following terms and conditions: 1. The Developer undertakes to develop substantially in accordance with the MCCRRP Master Development Plan the whole project into mixed used first-class residential, commercial, recreational, institutional, office and financial district area and provide therein the works, improvements and facilities as described in said Master Development Plan such as reclamation works and works containment structure, roadway system, drainage/storm sewer system, sewerage collection system, parks and street lighting system, power distribution system, provision for telephone distribution system and all landscaping and exterior design works; 2. The developer shall bear all the development expenses and other related costs and shall assume all risks related thereto. It shall also reimburse the Owner for the cost incurred in the preparation of technical engineering plan for the project and shall solely bear the cost necessary to procure all the necessary heavy equipment and engineering staff to carry out the development work of the project, purchase materials and supplies, including professional services required and implement all development works needed for the project. In addition, all expenses for the maintenance and upkeep of the roads and open spaces, curbs and gutters, lighting and all other facilities, including water channels surrounding the project, prior to turnover to Subdivision Association shall be for the account of the Developer; 3. For and in consideration of said agreement, the Owner shall receive sixty-five percent (65%) of the gross area of all lots inclusive of the area mandated to be devoted to roads and open spaces in the entire project, or an aggregate area approximately Ninety One and 65/100 (91.65) hectares. The Developer shall receive as its share, thirty five percent (35%) of the gross area, or approximately Forty Nine and 35/100 (49.35) hectares. As determined later, the total area of CBP-1 Islands A is One Million Seven Hundred Twenty Six Thousand Six Hundred Ninety square meters (1,726,690 sq. m.). Based on the agreed sharing scheme, the total area due to the developer is Six Hundred Four Thousand Three Hundred Forty Eight square meters (604,348 sq.m.); and 4. Titles or Certificate of pledge to lots assigned to the Developer shall be released pro-rata as per work accomplishment of the Developer, which shall be made for every five percent (5%) accomplishment based on over-all project. that consistent with its agreement with the Owner, the Developer stated and has continued the reclamation work on the CBP-1 Islands A and as of March 1999, the Developer has undertaken thirty-eight percent (38.08%) accomplishment in the development of the project; that the Owner now has caused the transfer of a portion of this developed area equivalent to One Hundred Seventy Four and Eighty Nine square meters (174,089 sq. m.) to the Developer by executing a Deed of Conveyance. In reply, please be informed as follows: 1. 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. 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 PEA and Shoemart, Inc. is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. 2. The allocation of saleable area of the project between PEA and Shoemart, Inc. in consideration of their respective contributions, as stipulated in the 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. However, upon the subsequent disposition by the co-ventures of the areas allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax rates under Section 24 and 27(A) both of the Tax Code of 1997 and to the creditable withholding tax under Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, as further amended by Revenue Regulations No. 2-98. However, said 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, fair market value or zonal value of the properties, whichever is higher. 3. The Partition Agreements whereby PEA and Shoemart, 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 area between the parties, as the return of the capital which each contributed. cdlex Moreover, 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 and is not in connection with a sale, no income was generated and a fortiori , no creditable withholding tax and 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. 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