BIR Ruling [DA-647-04]

December 21, 2004 BIR RULING [DA-647-04] 22 (B) DA-240-2001 Atty. Alan B. Quintana 2nd Floor, Renaissance Tower Meralco Ave., Pasig City S i r : This refers to your letter dated June 14, 2004, the pertinent portion of which is quoted as follows: "The Guysayko Family of Naga City, represented by their Attorney In-Fact, Crisanto D. Guysayko, Jr. (hereinafter referred to as the "Guysayko Family") is the registered and legal owners of a parcel of land at Barrio del Rosario, Naga City, presently covered by Transfer Certificate of Title No. 39094 of the Registry of Deeds for Naga City. "Pursuant to the Project Agreement, the Guysayko Family entered into a joint venture arrangement with Fil-Estate Properties, Inc. (FEPI) for the development of the above parcel of land into a residential subdivision with a 60%-40% sharing on the resultant saleable lots. The Guysayko Family contributes its landholding while FEPI will finance and infuse technical and development works on the subdivision project as their capital contributions, respectively. "The parties are now in the process of segregating the titles and consequently, partitioning and assigning 60% of the saleable lots to FEPI representing its share in the subdivision project. . . . that the said assignment is not subject to a Capital Gains Tax since the aforesaid assignment is not a taxable event but a mere return of capital contribution. The allocation is made merely to partition the saleable area between the parties, as the return of the capital which each has contributed. Said event will not lead to any rise in the payment of regular income and, therefore, not a taxable event. ". . . that since the allocation of the share in the subdivision is made without any monetary consideration and is not connected to any sale, the assignment shall not be subjected to Documentary Stamp Tax since there is no sale, exchange or other disposition of properties. . . ." HSTaEC Based on the foregoing, you now in effect request for a ruling on the tax consequence of the foregoing transaction. In reply, please be informed that 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 the Guysayco Family and FEPI 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 Guysayco Family and FEPI, in consideration of their respective contributions, as stipulated in the Partition 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 parcel of land, the Guysayco Family, neither sells, barters, exchanges goods, property nor renders 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 Guysayco Family and FEPI 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, as amended, 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. It is understood however, that upon the 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), whichever is applicable. Moreover, such sale shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, 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 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