BIR Ruling [DA-651-06]

November 3, 2006 BIR RULING [DA-651-06] Section 22 (B); BIR Ruling No. DA-277-2003 Casimiro Development Corporation 2nd Floor Casimiro Building Alabang-Zapote Road Zapote, Las Pias City Attention: Mr. Teofilo P. Casimiro President Gentlemen : This refers to your letter dated October 11, 2006 requesting clarification on the tax consequences of the Joint Venture Agreement ("JVA") by and between Sps. Emilio P. Casimiro and Amelia M. Rosanes, Sps. Teofilo P. Casimiro and Nenita C. Riguerra and Gabriel P. Casimiro ("Owners") and Casimiro Development Corporation ("Developer"). As represented the Owners are the absolute and registered owners of a parcel of land situated at Talon, Las Pias City ("Property") covered by Transfer Certificate of Title No. T-10236 issued by the Register of Deeds of Las Pias City with a gross land area of 9,983 square meters. 1. The Owners will contribute to the Project the above-described Property; 2. The Developer will undertake at its own expenses the land and site development and the construction of housing units. 3. Upon completion of the Project and as a return of the contributions made by the parties, designated units as specified in the Subdivision Agreement shall be allocated in separate ownership among the parties which will later be offered for sale; and 4. The Developer shall maintain at its own account the developed subdivision and its facilities until such time the roads and open spaces are turned-over to the local government or the homeowners' association. EcTDCI In reply, please be informed as follows: 1) Pursuant to Section 22(B) of the Tax Code of 1997, the term "corporation" shall include 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. Such being the case, the joint venture that will be formed as a result of the JVA by and between Sps. Emilio P. Casimiro and Amelia M. Rosanes, Sps. Teofilo P. Casimiro and Nenita C. Riguerra and Gabriel P. Casimiro and Casimiro Development Corporation for the construction of housing units is not subject to the corporate income tax under Section 27(A) 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. Considering the foregoing, the joint venture of Sps. Emilio P. Casimiro and Amelia M. Rosanes, Sps. Teofilo P. Casimiro and Nenita C. Riguerra and Gabriel P. Casimiro and Casimiro Development Corporation for the construction and development of the Project will not create a taxable joint venture within the meaning of Section 22(B), in relation to Section 27(A) of the Tax Code of 1997. 2) The allocation of their specific units in the Project between the parties in consideration of their contribution in the Project, as stipulated in the JVA, and the issuance of the corresponding Certificates of Title by the Registry of Deeds of Las Pias City to Sps. Emilio P. Casimiro and Amelia M. Rosanes, Sps. Teofilo P. Casimiro and Nenita C. Riguerra and Gabriel P. Casimiro and Casimiro Development Corporation representing their respective shares or participating interests in the Project as stipulated in the JVA is not a taxable event because the allocation is a mere return of capital that each contributed. The same is, therefore, not subject to income, withholding, value-added and documentary stamp taxes. Nonetheless, the acknowledgment to the Deed is subject to documentary stamp tax under Section 188 of the Tax Code of 1997. 3) It is only upon sale or disposition of the units allocated to the Sps. Emilio P. Casimiro and Amelia M. Rosanes, Sps. Teofilo P. Casimiro and Nenita C. Riguerra and Gabriel P. Casimiro and Casimiro Development Corporation to third parties that the gain realized by the parties in the said transaction will be subject to the regular 35% (now 33%) income tax under Section 27(A) of the Tax Code of 1997, the creditable withholding tax under Revenue Regulations (Rev. Regs.) No. 2-98, as amended by Rev. Regs. No. 6-2001 and the value-added tax under Section 106 of the Tax Code of 1997. The transfer of the said properties to third parties shall likewise be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 based on the consideration or the fair market value of the property being transferred, whichever is higher. CIScaA 4) Section 185 of the Revised Documentary Stamp Tax (DST) 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, since the Deed of Conveyance and Subdivision Agreement are without consideration and are not in connection with a sale, no income was generated and a fortiori , no income, creditable withholding, value-added and documentary taxes are payable and collectible. However, the acknowledgment to the Deed of Conveyance and Subdivision Agreement are subject to DST of P15.00 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 shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service