BIR Ruling [DA-640-99]

November 12, 1999 BIR RULING [DA-640-99] Ayala Land, Inc. Tower One, Ayala Triangle Ayala Avenue Makati City Attention: Atty . Ma . Angeli O . Lerma Manager-Legal Department Gentlemen : This refers to your letter dated November 3, 1999 requesting for a ruling on the tax implications of the Memorandum of Agreement entered into by and between Fern Realty Corporation (Fern) and Ayala Land, Inc. (ALI) for the development of parcels of land located in Barangay Pasong Tamo, Quezon City into a residential subdivision and/or other land uses. LexLib It is represented that Fern, a corporation duly organized and existing under Philippine laws, is the absolute and registered owner of a parcel of land located in Barangay Pasong Tamo, Quezon City with an aggregate area of 22,880 square meters and covered by TCT No. N-196010 issued by the Registry of Deeds of Quezon City; that on the other hand, ALI is likewise a corporation duly organized and existing under Philippine laws is the registered owner of a parcel of land located in Barangay Pasong Tamo, Quezon City containing an area of 110 square meters which constitutes a portion of TCT No. 196003 of the Registry of deeds for Quezon City; that taken together, both parcels of land comprise approximately 22,990 square meters; that on October 11, 1999, Fern and ALI entered into a Memorandum of Agreement for the joint development of the above-mentioned properties into a residential subdivision that will constitute Phase 2 of Ferndale Homes; that the project shall consist in the planning, financing, construction and development of the parcels of land and the building on each saleable lot a single-detached housing structure; and that the specific terms of the agreement are as follows: a. Fern and ALI shall contribute and pool together their respective parcels of land that will constitute the entire area of the project; b. In addition to the ALI parcel, ALI shall contribute the cash for the development and construction of the entire project and shall perform all the development work for the project; c. In consideration of, and in return for, their respective contributions to the project, Fern and ALI shall share in the distribution of the Housing Units comprising the project proportionate to their respective contributions. Thus, Fern shall be allocated and receive approximately 85% of all the Housing Units of the project, while ALI shall be allocated and receive 15% thereof; d. The parties shall select the Housing Units to represent their respective allocations. The actual distribution to the parties of the Housing Units received pursuant to their respective allocations shall be effected through the execution of Deed of Partition which the parties will execute without monetary consideration. Prior to the execution of the Deed of Partition, however, the parties shall have a pro-rated interest in the project, or any insurance proceeds, assets and rights pertaining to the project determined on the basis of the pro-rata allocation under paragraph (c) above; e. After distribution of the parcels, the parties shall maintain separate ownership of their allocated Housing. Based on the foregoing representations, you now request confirmation on the following issues: "1. The joint venture whereby Fern and ALI will contribute their respective parcels and ALI will, in addition, contribute the cash for the development of the parcels into a residential subdivision, the construction of the housing structure, and other development works, does not give rise to a taxable joint venture, hence, is not subject to corporate income tax pursuant to Section 22(B) in relation to Section 27(A) of the Tax Code; "2. The allocation and distribution of their respective shares in the project consisting of developed lots and the housing structures built thereon in consideration for their respective contributions to the joint venture is not a taxable event, hence, is not subject to the regular corporate income tax under Section 27(A) of the Tax Code, nor creditable withholding tax under Revenue Regulations No. 2-98, nor the value-added tax under Section 106 of the Tax Code, because the allocation is a mere return of capital that each of the parties contributed to the project; "3. The Deed of Partition to be executed by the parties whereby they allocate and distribute between them their respective shares in the project in exchange for their respective contributions is without monetary consideration, hence, is not subject to value-added tax under Section 106 of the Tax Code, income/creditable withholding tax under Revenue Regulations No. 2-98, and the documentary stamp tax under Section 196 of the Tax Code; "4. Consequently, the confirmation of this request will authorize the Revenue District Officer of the revenue district where the properties are located to issue the corresponding Tax Clearance Certificate with regard to the transfer of the titles to the lots to be received by ALI and Fern based on their respective allocations pursuant to the Deed of Partition without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax, and value added tax." In reply, please be informed that your opinion is hereby confirmed 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. It is to be emphasized, however, that P.D. 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 Fern and ALI for the development of the abovementioned parcels of land into a residential subdivision is not subject to corporate income tax under Section 27(A) of the Tax Code of 1997. However, the co-the venturers are separately subject to the regular corporate income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. Moreover, the Memorandum of Agreement entered into by and between Fern and ALI is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the Tax Code of 1997. However, the sale of the said real property shall be subject to the documentary stamp tax under Section 196 of the said Code. 2. The allocation and distribution of their respective shares in the project consisting of developed lots and the housing structures built thereon in consideration of their respective contributions, as stipulated in the Memorandum of Agreement is not a taxable event and is not subject to income tax, withholding tax, value-added tax and documentary stamp tax because the allocation is a mere return of capital that each has contributed. (BIR Ruling Nos. 10-96 dated January 23, 1996; DA065-97 dated February 10, 1997; DA286-98 dated June 29, 1998). 3. Since the Deed of Partition to be executed by the parties allocating and distributing between them their respective shares in the project in exchange for their respective contributions is without monetary consideration but merely acknowledges and confirms the title and ownership of Fern and ALI, the same is not subject to the value-added tax, income/creditable withholding tax nor to the documentary stamp tax respectively imposed under Sections 106, 27(A) as implemented by Revenue Regulations No. 2-98 and 196 all of the Tax Code of 1997. * 5. This will authorize the Revenue District Officer (RDO) of the revenue district where the properties are located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the transfer of the titles to the lots to be received by ALI and Fern based on their respective allocations pursuant to the Deed of Partition without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax and value-added tax. 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 shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)