Filinvest Asia Corp.

January 17, 2007 BIR RULING [DA-023-07] Sec. 22 Joint Venture Filinvest Asia Corp. 173 P. Gomez Street San Juan, Metro Manila Attention: Atty. Andrew James Gerard D. Ruiz Tax Counsel Gentlemen : This refers to your letter dated February 22, 2006 requesting confirmation of the various tax consequences arising from a Joint Venture Agreement for construction purposes, between Filinvest Asia Corporation and the Philippine Bank of Communications. It is represented that Filinvest Asia Corporation ("FAC" for brevity) is a corporation duly organized and existing under the laws of the Republic of the Philippines, engaged in the business of acquiring, developing, selling, mortgaging, exchanging and leasing real estates of all kinds, including, among others, office spaces and condominiums. The Philippine Bank of Communications ("PBCom" for brevity), on the other hand, is the owner of two (2) parcels of land (the "Property") located at No. 6795 Ayala Avenue corner V.A. Rufino Street, Makati, Metro Manila, with an aggregate area of Two Thousand Nine Hundred Ninety Seven square meters (2,997 sq.m.) covered by and more particularly described in Transfer Certificate of Title (TCT) No. 134599 of the Register of Deed of Makati, Metro Manila. On June 14, 1995, PBCom executed a Memorandum of Agreement ("MOA" for brevity) with Filinvest Development Corporation (FDC) and Filinvest Land, Inc. (FLI), for the development of the real property abovementioned. The salient portions of the MOA are as follows: 1. PBCom shall provide the Property while both FDC and FLI will contribute collective technical expertise and cash for the construction of a high-rise condominium tower; 2. In consideration for their respective contributions, the parties to the MOA agree to divide equally the high-rise condominium tower/project upon its completion. On November 12, 1996, FLI assigned, waived, and relinquished its rights, interest and participation in the MOA in favor of FDC. On November 22, 1996, FDC assigned its rights, title, benefits and interests in the MOA to FAC. On December 8, 2006, PBCom and FAC executed a Memorandum of Intent whereby they made clear that the intention of both parties in executing a MOA in 1995 and the execution of a First Supplemental Agreement in January 1996 to fully implement the transactions contemplated in the MOA, and further, the execution of a Joint Development Agreement ("JDA") in December 1996 to confirm the acts subsequent to the said MOA and Supplemental Agreement, has always been the pooling of resources by both PBCom and FAC, to undertake the construction of the condominium project. In view of the foregoing, you are requesting confirmation of your opinion as follows: 1. The MOA between PBCom and FAC, for the subdivision and vertical development of the abovementioned real property located in Makati, Metro Manila, into a high-rise condominium tower, will not give rise to a taxable joint venture as provided under Section 22 (B), in relation to Section 27 (A), both of the National Internal Revenue Code (NIRC), as amended; 2. The equal allocation of high-rise condominium tower/project upon its completion between PBCom and FAC in consideration of their respective contributions, as stipulated in the MOA, is not a taxable event and is not subject to income tax, and subsequently withholding tax, and the Value-Added Tax(VAT), since the allocation of saleable lots in fact a mere return of capital that each has contributed; 3. The Partition Agreement whereby PBCOM and FAC will allocate unto each other their share in the high-rise condominium tower/project in consideration of their respective contributions, is not subject to the documentary stamp tax DST imposed under Section 196 of the NIRC, as amended, nor to any income tax, and consequently withholding tax, since the allocation is made without monetary consideration and is not in connection with a sale. Neither can the said Partition of Agreement be subject to VAT as the allocation is not a sale, barter or exchange. Rather, the partition is made merely to segregate the saleable units between the parties, as the return of the capital each contributed. However, it is understood that should PBCom and/or FAC sell any of the saleable units allocated to them, to third parties, the gain that may be realized from said sale will be subject to regular (corporate) income tax at 35%, in accordance with Section 27 of the NIRC, as amended, and consequently to withholding tax as implemented under Revenue Regulations (RR) No. 2-98, as amended. Said sale by PBCom and/or FAC to third parties would likewise be subject to the VAT, as may be applicable. EcSCAD In reply, please be informed as follows: Section 22 (B) of the NIRC, as amended, states as follows: "Section 22. Definitions . When used in this Title: xxx xxx xxx (B) the term 'corporation' shall include 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. 'General professional partnerships' are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business." (emphasis supplied) The abovementioned exemption was initiated under Presidential Decree (PD) No. 929, dated May 14, 1976, which amended the definition of a "taxable" corporation in the Tax Code, as amended, to specifically exclude joint ventures formed for the purpose of undertaking construction projects. Said PD instituted the amendment of the definition of the term "taxable" corporation in recognition of the following situations: (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 local contractors to enter into joint ventures to pool, their limited resources in undertaking big construction projects. Hence, to assist the local contractors in achieving competitiveness with foreign contractors, the joint ventures formed by said local contractors were thus deemed as not falling under the definition of a "taxable" corporation, and thus not subject to income tax. This was, and still is, the intention of the legislature. Such being the case, the MOA entered into by and between PBCom and FAC 1 is not subject to the income tax under Section 27 (A) of the Tax Code of 1997, as amended. Moreover, the allocation of the saleable units between PBCom and FAC, which is done effectively in consideration of their respective contributions, does not constitute a taxable event, as no income is actually realized by either PBCom and/or FAC. The Partition Agreement or Deed of Allocation will be executed without consideration, and will not be in connection with any sale between the said parties. As has been ruled by the BIR on numerous occasions, income, in a broad sense, means all wealth which flows into the taxpayer other than as a mere return of capital ( Section 36, RR No. 2) . PBCom and FAC, both having contributed to the development of the aforementioned real property, did not realize any income upon the allocation of the saleable units. Hence, the allocation of units arising from the Partition Agreement is not subject to income tax, and consequently, to withholding tax. The said allocation, likewise, is not subject to VAT. PBCom and/or FAC will only realize income upon their respective sales of the saleable units allocated to each of them. In this regard, said sales to third parties, if ever undertaken, would be subject to regular (corporate) income tax at 35%, in accordance with Section 27 of the 1997 Tax Code, as amended, and consequently to withholding tax as implemented under Revenue Regulations (RR) No. 2-98, as amended. Further, the Partition Agreement or Deed of Allocation whereby PBCom and FAC have allocated unto each other their share in the saleable units in consideration of their respective contributions, is not subject to the DST imposed under Section 196 of the 1997 Tax Code, as amended, considering that, as stated earlier, the allocation is made without monetary consideration and is not in connection with a sale. In this regard, 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 of Agreement were executed without consideration and were not in connection with a sale between PBCom and FAC, no DST therefore is due and collectible on said Partition Agreement. However, the notarial acknowledgement to said Partition Agreement shall be subject to the DST pursuant to Section 188 of the 1997 Tax Code, as amended, in the amount of P15.00. SHAcID 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, this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. FAC as the assignee of all rights, title, benefits and interests of FLI and FDC in the MOA executed by FLI and FDC with PBCOM.