Anna Celestina R. Cruz

October 22, 2008 BIR RULING [DA-(JV-037) 326-08] Section 22 (B); DA-409-2005 Anna Celestina R. Cruz 3-C Maliksi St., Piahan Quezon City M a d a m : This refers to your letter dated June 6, 2008 stating that on October 29, 2003, Edison G. Tantuco, Edbert G. Tantuco, Edgard G. Tantuco, Eloisa G. Tantuco, Edwin G. Tantuco, Emilie T. Que, Luz T. Sy, and Ellis Island Realty Corporation (the Owner), entered into a Joint Venture Agreement (attached as Annex "A") with Sta. Lucia Realty and Development, Inc. (the Developer) for the development of the Owner's 615,483 sq.m. property, covered by various Transfer Certificates of Title, namely: TCT No. Lot No. Area T-290790 735 1,196 T-290791 699 2,788 T-300591 14,251 3,534 T-306742 4635 12,712 T-348633 924-C 21,087 T-305471 927 28,771 T-307610 737-A 11,184 T-290793 703 7,068 T-317017 702 2,808 T-314770 701 8,095 T-294146 692 50,435 T-300590 693 9,146 T-290789 700 101,818 T-306738 4645 2,110 T-306736 4640 7,739 T-328763 4644 4,483 T-348935 4654 5,588 T-314670 4653-B 3,572 T-309984 4650 7,451 T-338888 11070 6,895 T-306741 4827 4,893 T-309985 4822 1,797 T-306740 4669 4,160 T-303965 4643-A 8,398 T-303963 4641 5,146 T-306879 14323 24,936 T-306739 4648 3,602 T-317694 4656-B 19,808 T-334152 4656-A 20,663 T-330476 4671-B 19,012 T-315244 4671-A 10,000 T-303964 4642 3,631 T-373740 4649 11,874 T-303731 4638 9,667 T-306775 4637 945 T-305472 928 16,786 T-324085 732 10,862 T-323377 731 10,997 T-314821 729-A-2-D 6,967 T-315374 729-A-2-C 6,966 T-314469 729-A-2-B 6,966 T-314468 729-A-2 6,966 T-291010 737-B 11,184 T-306737 4634 6,461 T-368318 728-C 53,276 T-386927 4636 976 T-386928 4646 348 T-366348 696 18,899 T-374670 4647 3,899 T-368698 729-A-1 1,403 T-411978 4651 5,515 all located in Mun. of Tayabas, Province of Quezon into a commercial/residential subdivision with a lot sharing of 60-40 [in favor of the Developer] for the resultant lots of the residential portion and 50-50 for the resultant lots of commercial portion; that in accordance with the joint venture agreement, the Developer has caused the development of the properties and the project is now in the process of segregation and transfer of the corresponding share of the Developer in the resultant titles representing its 60% [for the residential portion] and 50% [for the commercial portion] share of the project; that a Memorandum of Sharing was already executed to transfer the 60% [for the residential portion] and 50% [for the commercial portion] of the Developer in the resultant subdivision lots; and that you now request for an opinion on the tax consequences of the following transactions: AcISTE 1. What would be the taxes involved when the Owner's transfer to the Developer its share of total saleable lots for its development of the project? Would there be capital gains tax and documentary stamp tax (and if there are, how much) when the parties eventually execute a Deed of Assignment for the resultant lots in the project? 2. What would be the taxes involved when the parties eventually sell their respective shares of saleable lots to a third party? 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 Owner and the Developer is not subject to income tax under Section 27 of the Tax Code of 1997. IcCDAS The assignment by the Owner to the Developer of its corresponding share of the resultant subdivision lots 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 Sharing Scheme whereby the Owner and the Developer will allocate unto each other their shares in 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 acknowledgement to said Sharing Scheme 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) 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 the parcel of land, the Owner, neither sells, barters, exchanges goods or properties nor renders service 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), 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 properties, whichever is higher. Furthermore, the said sale shall likewise be subject to VAT. IcTEaC 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service