BIR Ruling [DA-695-99]

December 17, 1999 BIR RULING [DA-695-99] 22 (B), 27 (A), 196, 57 (B) DA-633-99 DA-695-99 Corporate Counsels, Philippine Law Offices Suite 1905 Security Bank Centre 6776 Ayala Avenue Makati City Attention: Mr . Tomas F . Tuason IV Corporate Secretary Gentlemen : This refers to your letter dated November 12, 1999 requesting for a confirmation of your opinion that the Joint Venture Agreement (JVA) between Philippine Estates Corporation (PHES) and Inland Container Corporation, International Polymer Corporation, Kennex Container Corporation, Pacific Rehouse Corporation, Rexlon Industrial Corporation and Ropeman International Corporation (Corporations) for the development of an industrial park will not create a taxable entity and that their allocation of certain percentage in the net saleable area and in the net sales proceeds of the individual lots to the co-ventures and PHES respectively, based on their respective participating interests in the project are not taxable events. Likewise, that it is only upon actual sale to third persons that the parties to the JVA shall be liable to income tax and/or expanded withholding tax to the extent of their respective interest in the JVA. It appears that the Corporations are the registered owners of several parcels of land all of which are situated at Barrio Canumay, Valenzuela, Metro Manila with an area of approximately 29.5629 hectares (Property); that PHES is a corporation engaged in the development and marketing of real estate projects; that it desires to develop the said Property into an Industrial Estate to be referred to as the "Plastic City Industrial Park"; and that a JVA was executed on July 4, 1997, in which they agreed on the following terms and conditions: "1. The DEVELOPER shall prepare the land use plans, engineering designs, and such other plans as are necessary to develop the Property into an Industrial Estate in accordance with the rules and regulations, or as required by, the Housing and Land Use Regulatory Board, Bureau of Lands, and such other government agencies that regulate or control or may hereinafter regulate or control the construction and development of industrial estates. "2. The DEVELOPER and the OWNERS shall secure and pay in proportion to their respective shares in the industrial lots as set forth in paragraph 6, for all the necessary licenses plus the costs of the required bond, permits, approval from the City Government, HLURB, MERALCO and all other government agencies having authority on industrial estates. The OWNERS shall secure the necessary DAR clearances at its own expense. LibLex "3. The DEVELOPER shall furnish at its expense all materials, equipment, labor and services to develop the Property into an industrial estate, all in accordance with the plans and specifications and design standards approved by the parties and the government agencies concerned. "4. Upon signing of this Agreement, the OWNERS shall allow the DEVELOPER to take possession of the Property. The OWNERS hereby represents and warrants that the DEVELOPER shall have peaceful possession of the Property, that the same are not tenanted nor planted to rice and corn nor occupied by squatters; and that real estates taxes on the Property have been duly paid as of the date of signing of this Agreement. "5. The DEVELOPER shall develop the Property into an industrial estate in accordance with the plans mutually agreed by both parties and with the requirements of all government agencies concerned. "6. The OWNERS agree to compensate the DEVELOPER with a developer's fee equivalent to forty percent (40%) of the net sales proceeds after deducting all relevant taxes and marketing expenses and administrative expenses (including sales administrative expenses), and the remaining sixty percent (60%) of the said net sales proceeds shall constitute the share of the OWNERS. The share of the OWNERS in the 60% net sales proceeds shall be in proportion to the areas of the Property respectively owned by them. All roads and open spaces shall be turned over to the Municipal Government. Prior to said turn over, all maintenance expenses and real estate taxes pertaining to the roads and open spaces shall be for the account of the OWNERS and the DEVELOPER in proportion to their respective share in the developed industrial lots. "7. All real estate taxes beginning the 2nd quarter of 1997 shall be borne by the parties based on the proportion to their respective share in the developed industrial lots. "8. The individual titles over the net saleable area to be issued by the Register of Deeds shall be placed in the joint names of the DEVELOPER and the OWNERS which will become joint owners of the industrial lots in the proportion set forth in paragraph 6. All expenses of segregation/registration of the mother title to the individual subdivided titles in the names of the parties to the extent of their respective shares, shall be for the account of the DEVELOPER and the OWNERS in the proportion of their respective shares. "9. The marketing of all saleable areas shall be centralized and managed by the DEVELOPER. All marketing expenses (including sales administration expenses) shall be deducted from the sales proceeds. The DEVELOPER may designate a marketing agency or agencies to market the industrial lots under such terms and conditions as shall be mutually agreed upon by the DEVELOPER and the OWNERS. cdlex "10. All developments/industrial plans shall be subject to the conformity and approval of the OWNERS whose representative shall have the right of visitation and inspection at any time on the industrial site. "11. In case the Property or any portion thereof is still titled in the name of the OWNER's predecessor-in-interest, the OWNERS shall cause the same to be transferred in its name and shall pay the required taxes and fees therefor. It is further understood that the DEVELOPER shall not commence its obligations under this contract until the property is titled in the name of the OWNERS. "12. Any and all prior Agreement entered into by and between the parties hereto mentioned are hereby deemed superseded by this Agreement." In reply, please be informed as follows: 1. 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. LibLex 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 Agreement entered into by and between PHES and the Corporation is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. prcd 2. The allocation of the units between PHES and the Corporations in consideration of their respective contributions, as stipulated in the Joint Venture 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. However, upon the subsequent disposition by the co-ventures of the lots allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax rates under Section 24 and Section 27(A) both of the Tax Code of 1997 and to the creditable withholding tax under Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, as further amended by Revenue Regulations No. 2-98. The said sale is also subject to the documentary stamp tax under Section 196 of the Tax Code of 1997, based on the consideration or the fair market value of the property, whichever is higher. 3. The Partition Agreement whereby PHES and the Corporations will allocate unto each other their share in the units in consideration of their respective contributions, is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, 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 units between the parties, as return of the capital which each contributed. 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, since the aforementioned Partition Agreement is without consideration and is not in connection with a sale, no income was generated and a fortiori , no creditable withholding tax and documentary stamp tax are payable and collectible. However, the acknowledgment to said Partition Agreement is subject to documentary stamp tax 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. cdll Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group