BIR Ruling [DA-729-06]

December 18, 2006 BIR RULING [DA-729-06] 22 (B); DA-345-2004 ASB Development Corporation ASB Center 114 Benavidez St., Legaspi Village Makati City Attention: Atty. Rolando P. Domingo Senior Vice-President Gentlemen : This refers to your letter dated November 7, 2006 stating that ASB Development Corporation (ASBDC) is a corporation organized and existing under and by virtue of the laws of the Republic of the Philippines, with principal office at 4th Floor, St. Francis Square, Julia Vargas Avenue corner Bank Drive, Ortigas Center, Mandaluyong City. ASBDC will enter into a Participation Agreement with Rizal Commercial Banking Corporation (RCBC), a corporation likewise duly organized and existing under and by virtue of Philippine laws, with office address at Yuchengco Tower, RCBC Plaza, 6819 Ayala Avenue, Makati City, and with the Project Governing Board for the Rehabilitation Plan of ASB Group of Companies (PGB), a board created and organized pursuant to the Rehabilitation Plan of ASB Group of Companies with office address at 4th Floor, St. Francis Square, Julia Vargas Avenue corner Bank Drive, Ortigas Center, Mandaluyong City for the construction and development of St. Francis Square Tower Project as provided in the agreement among them. As provided in the agreement, ASBDC will contribute the lot where the Project will be constructed while RCBC will convert its receivables from ASBDC into the Project and ASBDC in cooperation with PGB will complete the Project. As proportionate return of their respective contributions to the project, the parties shall receive condominium units and exclusive right to use parking spaces on the project which had been determined by drawings of lots. With respect to RCBC, the mortgage on ASBDC's property will remain until the issuance of the Condominium Certificate of Title (CCTs). Based on the above provisions of the Agreement, you now would like to request for a ruling to confirm your opinion that: 1. The agreement among ASBDC, RCBC and PGB is in the nature of a joint venture for the construction and development of St. Francis Square Tower Project and 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. AHcDEI 2. The allocation of the units and issuance of the corresponding Condominium Certificates of Titles by the Registry of Deeds of Mandaluyong City directly in the name of the parties representing their interest in the project as stipulated in their Agreement is not taxable event that will give rise to the payment or regular income tax/creditable withholding tax because the allocation is a mere return of their capital contribution. 3. The allocation of the units is also not subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997 because the allocation is a mere return of their capital contribution. 4. The allocation of the units is also not subject to VAT since under Section 105 of the Tax Code of 1997, only persons 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 Section 106 to 108 of the same Tax Code. 5. The subsequent disposition/sale of the allocated units by RCBC is subject to creditable withholdings tax under RR No. 2-98 as amended by RR No. 6-2001 and to documentary stamp tax imposed under Section 196 of the 1997 Tax Code. Since RCBC is a bank, it is not subject to VAT but to gross receipts tax (GRT) on the gain on its subsequent sale/disposition. 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 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 ASBDC, RCBC and PGB is not subject to income tax under Section 27 of the Tax Code of 1997. 2. The allocation of the units and parking spaces and issuance of the corresponding CCTs by the Registry of Deeds of Mandaluyong City directly in the name of the parties representing their interest in the project as stipulated in their Agreement is not taxable event that will give rise to the payment or regular income tax/creditable withholding tax because the allocation is a mere return of their capital contribution, and therefore not a taxable event. 3. The allocation of the units in proportion of the co-venturers contributions is also not subject to 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 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 likewise 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 the parcel of land, ASBDC, neither sells, barters, exchanges 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) 5. 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 sale by ASBDC shall be subject to VAT, while RCBC shall be liable to gross receipts tax (GRT). 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