BIR Ruling [DA-656-04]

December 22, 2004 BIR RULING [DA-656-04] 22 (B) DA-192-2001 E.L. Punsalan and Associates G-104, Medical Plaza Makati Amorsolo corner Dela Rosa Sts. Legaspi Village, Makati City Attention: Atty. Eranio L. Punsalan Counsel for Landowners Gentlemen : This refers to your letter dated December 21, 2004, pertinent portions of which are quoted as follows: "We write for and in behalf of our clients, (DIONISIO FALGUI III, registered owner of TCT No. T-100550, MA. DIANA P. PALGUI registered owner of TCT No. T-50971, RICHARD DIO FALGUI, registered owner of TCT No. T-50970 and JOJO F. ALONZO registered owner of TCT No. T-100549, herein represented by their Attorney-in-Fact, AMOR P. FALGUI and with residence at Tabuk, Kalinga; GIL JAY PALACIO, MARY GRACE PALACIO and RONALD DANIEL PALACIO, registered owners of TCT No. T-51104, herein represented by their Attorney-in-Fact, GIL M. PALACIO with residence at Balayan, Batangas; GEMINIANO P. NOCHE, JR and EMILY P. NOCHE, registered owners of TCT No. T-51105, herein represented by their Attorney-in-Fact, EMELITA P. NOCHE and with residence at Balayan, Batangas; and RAFAEL C. PALACIO, JR. and JASMIN C. PALACIO, registered owners of TCT No. T-50972, herein represented by their Attorney-in-Fact, RAFAEL M. PALACIO and with residence at Balayan, Batangas), all Filipinos, of legal age, herein referred to as the "LANDOWNERS". Our Client entered into a Joint Venture Contract with LANDCO PACIFIC CORPORATION (LANDCO), a corporation organized and existing under Philippine Laws, represented herein by its President, ALFRED A. XEREZ-BURGOS, JR., with postal address at 3rd Floor, Centermall Building, Presidents Avenue, BF Homes, Paraaque City, Metro Manila, for the development of CALATAGAN-PALACIO PROJECT on the parcels of land, covered by Transfer Certificates of Title Nos. T-100550, T-50971, T-50970, T-100549, T-51104, T-51105 and T-50972 . . . xxx xxx xxx While the LANDOWNERS contribute to the Joint Venture their parcels of land, LANDCO undertakes to do all acts requisites to developing it into a first class community complete with facilities and amenities, as per computer generated plan and perspective drawing of the project. Upon the completion of the work by LANDCO, to the satisfaction of LANDOWNERS, the former commits to contribute to the project, the foregoing parcels of land, equivalent to NINE HUNDRED TWENTY TWO THOUSAND SEVEN HUNDRED EIGHTY FIVE (922,785) SQUARE METERS." Based on the foregoing facts and circumstances, your client requests for a ruling relative to the following: 1. Exemption of the Joint Venture from income tax under Section 27, in relation to Section 22(B) of the Tax Code of 1997 and the relevant provisions of Presidential Decree (PD) No. 929; 2. Exemption of the assignment by the Landowners of its realty to LANDCO from corporate income tax/creditable withholding tax and capital gains tax, it being merely a transaction to effect its capital contribution to the joint venture and not a taxable event; 3. Exemption of the Partition Agreement (Joint Venture Contract, Article V. Shares of the Parties) between LANDCO and Landowners, whereby the parties agreed to allocate to each other their aliquot shares of sixty (60%) percent and forty (40%) percent, respectively, in consideration of their capital contribution, from documentary stamp tax imposed under Sections 196 or 176 of the Tax Code of 1997, as the case may be. The allocation is neither with monetary consideration nor in connection with a sale. This is merely to segregate the saleable areas between the two parties, as a return of their capital contribution in the joint venture; 4. Exemption of the transfer of the saleable areas to LANDCO and LANDOWNERS, pursuant to the dictates of the immediately preceding paragraph, from Value Added Tax (VAT) under Section 105 of the 1997 Tax Code. The said transfer is neither a sale, barter, exchange of goods, property nor services rendered that is subject to VAT. In reply, please be informed that: 1. 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. 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 as additional income tax lien. Considering therefore, 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 hereby opines that the joint venture by and between the Landowners and LANDCO is not subject to income tax under Section 27 of the Tax Code of 1997. 2. The assignment by the Landowners to LANDCO of their corresponding shares in the aforesaid project is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax, because the above-stated assignment is a transaction to effect its capital contribution, and therefore not a taxable event. (BIR Ruling No. DA-192-2001 dated October 17, 2001) EcTaSC 3. The Partition Agreement whereby the Landowners and LANDCO will allocate unto each other their share in the Net Project Proceeds, in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 because the allocation is made without monetary consideration and is not in connection with a sale. The allocation is made merely to segregate the Net Project Proceeds between the parties, as the return of the capital which each has contributed. However, the acknowledgement to said Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. DA-240-2001 dated November 16, 2001) 4. 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 parcels of land, the Landowners, neither sell, barter, exchange goods, properties nor render 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) 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, 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 shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service