BIR Ruling [DA-661-06]

November 7, 2006 BIR RULING [DA-661-06] 22 (B); DA-192-2001 Asiatic Development Corporation Asiatic Bldg., Phoenix Sun Business Park E. Rodriguez, Jr. Avenue, Libis Quezon City Attention: Mr. Emiliano C. Estrella SVP-Comptroller Gentlemen : This refers to your letter dated August 31, 2006 stating that Asiatic Development Corporation (ADC), as developer, entered into two (2) Joint Venture Agreements with Lakeview Golf and Country Club, Inc., Lakeview Realty Corporation (now, Credito Asiatic, Inc.) and Manphil Investment Corporation (the Owners) on August 30, 2004 for the development and marketing of the Owners' 554,762 square meters property covered by TCT Nos. T-75093 and T-91583 of the Registry of Deeds for the Province of Cavite located at General Mariano Alvarez (GMA), Cavite into a mixed residential-commercial subdivision. The Owners and ADC agree to share 50:50 on the resultant saleable lots of the subdivision or on the net proceeds of the sale of the saleable lots. A Memorandum of Sharing was already executed to cause the issuance and transfer of all the resultant titles of the subdivision to ADC and to share on the net proceeds of the sale of saleable lots. In accordance with the joint venture agreements, you have caused the development of the properties and the project is now in the process of segregation and issuance and transfer of resultant titles to ADC. You now respectfully request for an opinion on the tax consequence of your transaction. Specifically, the following: 1. What would be the taxes involved when the Owners through the Joint Venture Agreements and the Memorandum of Sharing transfer to ADC the resultant titles of the properties? Would the transaction be subject to or exempted from the expanded withholding tax of capital gains tax and documentary stamp tax when the titles are issued and transferred to ADC? IScaAE 2. What would be the taxes involved when the parties eventually sell the saleable lots to third party and share in the net proceeds? 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. P.D. No. 929 amended the definition of the taxable corporation so 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 Owners and ADC is not subject to income tax under Section 27 of the Tax Code of 1997. The assignment by the Owners to ADC of its corresponding share of the resultant saleable lots/net proceeds 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 aforestated assignment is a mere return of capital contribution, and therefore not a taxable event (BIR Ruling No. DA-192-2001 dated October 17, 2001) The Memorandum of Sharing whereby the Owners and ADC will allocate unto each other their shares on the 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, because the allocation is made without monetary consideration and is not in connection with a sale. The allocation 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 Memorandum of Sharing is subject to the documentary stamp pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. DA-240-2001 dated November 16, 2001) ITcCSA 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 Owners, 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 27(D)(5), as the case may be. 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 property, 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service