BIR Ruling [DA-641-99]

November 15, 1999 BIR RULING [DA-641-99] Urban Bank UrbanBank Plaza Urban Avenue Makati City Attention: Ms . Corazon M . Bejasa Senior Vice President Mr. Rodolfo B. Aquino Senior Manager Gentlemen : This refers to your letter dated October 19, 1999 stating that your bank, Urban Bank (URBANK) entered into a Memorandum of Agreement (MOA) dated September 24, 1994 with Urbancorp Realty Developers, Inc. (URBANCORP), its wholly-owned subsidiary, whereby the parties agreed to undertake a joint project for the construction and development of UrbanBank Plaza by contributing property and funds to the project in accordance with the following terms and conditions: "(1) Pre-Construction Phase (a) URBANCORP initially contributed its rights and interest over the parcel of land covered by Transfer Certificate of Title (TCT) No. 142681 valued at P165 Million. (b) URBANK, in turn, initially also contributed its property covered by TCT No. 142682 valued at P145 Million plus cash amounting to P30 Million. "(2) Construction Phase (a) URBANCORP shall put funds of up to P330 Million to finance the first stage of construction, 50% of which shall be considered as advances on behalf of URBANK on its 50% share of the construction costs. (b) URBANK shall pay the financing charges on its 50% share of the funds actually advanced by URBANCORP amounting to P330 Million to finance the construction-in-progress of the Building, URBANK, however, may advance the funds for its 50% share of the construction cost in which case, it shall not be liable to pay for any financing charges. "(3) Upon Completion (a) The Building shall be set up as a condominium. The net saleable office/commercial spaces in the Building shall be allocated to the parties based on a 50/50 basis with the corresponding Condominium Certificates of Title (CCT) issued in the respective names of the parties. (b) Considering that URBANK will use its allocated spaces as its main headquarters, URBANK shall have the first option, for its 50% allocation, to acquire the ground floor, basement, the top three (3) floors of the office tower and the bottom consecutive floors of the office tower for its office and other business requirements. (c) Parking slots shall be shared by the parties on a 50/50 basis. (d) Title to the common areas shall be placed in the name of the condominium corporation, which will be established for the purpose. "(4) Other provisions (a) The costs and expenses incurred relative to this condominium project shall be shared by the parties on a 50/50 basis and carried as costs or expenses in the respective books of accounts URBANK and URBANCORP. (b) The relationship of the parties to the MOA is limited categorically to the matters set forth therein and shall not be construed as partnership or any other relationship where anyone of the parties will be liable for the acts of the other party. Based on the foregoing provisions in the MOA, you now request for a ruling on the following: "1. The MOA between URBANK and URBANCORP for the construction of the Building on a joint project basis and the 50/50 allocation of the net saleable office/commercial spaces and parking slots upon competition thereof did not result in a separate taxable joint venture arrangement under and within the meaning of Section 20(b) of the National Internal Revenue Code (NIRC), as amended by R.A. 8424 (the Tax Reform Act of 1997). "2. The 50/50 allocation of the designated units and parking slots in the Building to URBANK and URBANCORP, representing their respective share or participation in the Project does not give rise to a taxable event since such allocation is merely a return of the capital invested by them to the joint building project. Thus, the same is not subject to the expanded creditable withholding tax under Revenue Regulations No. 2-98 nor to Documentary Stamp Tax under Section 196 of the NIRC, as amended. "3 The conveyance by URBANK and URBANCORP of title to the common areas to the Condominium Corporation, without any monetary consideration and pursuant to the requirement of the Condominium Law, shall likewise not be subject to the expanded creditable withholding tax nor to DST. In reply, please be informed that 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. In view thereof, it is our opinion that the joint venture of URBANK and URBANCORP is not subject to the corporate income tax under Section 27 of the Tax Code of 1997. However, the co-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. llcd Considering the foregoing, the MOA executed by URBANK and URBANCORP for the construction and development of the UrbanBank Plaza, and the allocation of their specific portions will not give rise to a separate taxable joint venture within the meaning of Section 22(B), in relation to Section 27(A) of the Tax Code of 1997, and that the allocation between URBANK and URBANCORP in consideration of their contribution in the project, as stipulated in the MOA, is not taxable event and is not subject to income/withholding tax because the allocation is a mere return of the capital that each has contributed to the project. However, should URBANK and URBANCORP sell any of the shares allocated to them to third parties, the gain that may be realized by URBANK and URBANCORP from such sale will be subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997, and to the creditable/expanded withholding tax under Revenue Regulations No. 2-98, as amended (BIR Ruling No. 274-992 dated September 30, 1992; BIR Ruling No. UN-025-95 dated January 11, 1995) and the transfer shall be subject to the documentary stamp tax imposed under Section 196 of the same Code, based on the consideration or the fair market value of the property whichever is higher. 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 are not taxable". Accordingly, the MOA executed between the parties are without consideration and are not in connection with a sale made to URBANK and URBANCORP, respectively, no income will be generated and a fortiori , no creditable/expanded withholding and documentary stamp taxes are payable and collectible. However, the acknowledgments to the Partition Agreement is subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code of 1997. Likewise, since the Partition/Sharing Agreement to be executed by URBANK and URBANCORP, whereby the parties shall effect the transfer of the title in their respective names in accordance with the agreed allocation of their respective shares in the project, in consideration of their respective contributions in the project is without consideration, the same will not be subject to income, creditable/expanded withholding and documentary stamp taxes under Section 196 of the Tax Code of 1997. (BIR Ruling No. 207-92 dated July 16, 1992, 349-343 dated July 30, 1993 and UN-025-95 dated January 11, 1995. 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. cdlex Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)