SGV & Co.

January 19, 2007 BIR RULING [DA-027-07] Sec. 22 Joint Venture SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. R.C. Vinzon Gentlemen : This refers to your letter dated November 23, 2006 requesting on behalf of your client, LANDCO PACIFIC CORPORATION for confirmation of your opinion on the following issues, viz. : 1. The joint venture by and between Landco Pacific Corporation as Developer and Villa Escudero Corporation, Pook Handicraft, Rosade Realty Development Corp., Spicewise Farms, Inc., Vintage Orchard, Inc., Vesco Management Corporation, Labasin Ponds, Inc., Mahogany Farms, Inc., Sankris Marketing Corporation, Tierra Bonita Gardens, Sto. Nio Vintage Spirits, Village Horticulture Corporation, Villa Livestock Corporation, Vista Nueva Farms, Consuelo Escudero and Vespark, Inc. as Landowners is not subject to income tax under Section 27 of the Tax Code of 1997, as amended, as a separate taxable entity. 2. The assignment of the resultant saleable lots, road lots, parks, easements, open spaces and other common areas by the Landowners to the Developer as the latter's share in the 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 is not a taxable event. 3. The assignment of the resultant saleable lots, road lots, parks, easements, open spaces and other common areas by the Landowners to the Developer as the latter's share in the project is not subject to VAT since under Section 105 of the Tax Code of 1997, as amended any person who, in the course of trade or business, sells, barters, exchanges, lease 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 parcels of land, the Landowners, neither sell, barter, exchange goods, properties nor render service to be subject to VAT. 4. The Memorandum of Agreement whereby the Developer and the Landowners will allocate their respective shares in the saleable lots, road lots, parks, easements, open spaces and other common areas in consideration of their respective contributions is not subject to the documentary stamp imposed under Section 196 of the Tax Code of 1997, as amended, 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, road lots, parks, easements, open spaces and other common areas between the parties, as the return of the capital which each has contributed. 5. The transfer without monetary compensation by the joint venture partners of road lots, parks, easements, and open spaces situated in the project subject of the joint venture of the village association is exempt from the capital gains tax and donor's tax. 6. The conveyance of the land and common areas of the Project in favor of the village association being without monetary consideration and not in connection with a sale made to the village association did not generate income and a fortiori, not subject to income tax and/or creditable withholding tax. Since the said conveyance is not a sale, it is likewise not subject to VAT imposed under Section 106 of the Tax Code of 1997, as amended, neither will it be subject to the documentary stamp tax on sales or conveyance of real property imposed under Section 196 of the same Code. However, the notarial acknowledgment to said Deed of Conveyance is subject to documentary stamp tax of fifteen pesos (P15.00) pursuant to Section 188 of the Tax Code of 1997. It is represented that a Joint Venture Memorandum of Agreement (JVA) for the proposed residential subdivision project in Brgy. Sto. Nio and Sta. Elena, San Pablo City, Laguna was entered into by your client, Landco Pacific Corporation, as Developer and Villa Escudero Corporation, Pook Handicraft, Rosade Realty Development Corp., Spicewise Farms, Inc., Vintage Orchard, Inc., Vesco Management Corporation, Labasin Ponds, Inc., Mahogany Farms, Inc., Sankris Marketing Corporation, Tierra Bonita Gardens, Sto. Nio Vintage Spirits, Village Horticulture Corporation, Villa Livestock Corporation, Vista Nueva Farms, Consuelo Escudero and Vespark Inc. as Landowners. The Landowners are the absolute, registered or beneficial owners of the real properties located in Brgy. Sto. Nio and Sta. Elena, San Pablo City, Laguna consisting of approximately One Million Thirty Two Thousand One Hundred Forty Six square meters (1,032,146 sq. m.) covered by various Transfer Certificate of Titles (TCTs). The Developer is a corporation organized and existing under the laws of the Philippines. It has the managerial expertise, experience, organization and financial resources to develop the above-described real estate properties to their highest and best use, yielding optimal profits and ensuring value appreciation over time. The salient feature of the JVA are as follows: "5.0 SHARING SCHEME The Developer and Landowners agree to share the Project Proceeds by way of subdivision lots of the Project under the following ratio: a) The LANDOWNER shall be entitled to FORTY PERCENT (40%) of the subdivision lots and b) The DEVELOPER shall be entitled to SIXTY PERCENT (60%) of the subdivision lots. The size/s and location/s of the subdivision lots shall be subject to mutual agreement of the parties. The subdivision lots distributed to either party will be subject to the same restrictions imposed on the other lots to be sold to third parties. To this end, the parties agree to jointly create and effective system for the distribution and sale of the said lots." Roads lots, parks, easements, open spaces and other common areas shall also be shared by the developer and landowner using the 60%/40% ratio. As soon as the Village Association is created, the said road lots, parks, easements, open spaces and other common areas shall be turned over to the Village Association. In reply, please be informed that this Office hereby confirms your opinion as follows: 1. Section 22 (B) of the Tax Code of 1997 provides that 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. It is to be emphasized, however, that P.D. 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 an additional income tax lien. Considering that it is the intention of the legislature to exclude the joint venture or consortium formed for the purpose of undertaking construction projects from the definition of taxable corporation, the JVA entered into by and between the Landowner and the Developer is not subject to the corporate income tax under Section 27 (A) of the Tax Code of 1997 and is not required to file quarterly and final or adjustment/income tax returns. However, the co-venturers are separately subject to the regular income/corporate income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. (BIR Ruling No. DA-194-06 dated March 28, 2006) 2. The allocation and distribution of their respective shares in the Project (saleable lots, road lots, parks, easements, open spaces and other common areas) in consideration for their respective contributions to the said JVA is not a taxable event and is not subject to income tax, withholding tax, value-added tax and documentary stamp tax because the allocation is a mere return of capital that each has contributed. Moreover, in the event that any party defers its right to receive specific allocation to a later phase of the project for as long as such allocation constitutes part of the total return of its capital, such deferment is still not subject to the aforementioned taxes. However, upon the subsequent disposition by the co-venturers of the said saleable lots allocated to them, the gain that may be realized by them from such sale will be subject to income tax, and consequently, to the creditable withholding tax imposed under Revenue Regulations No. 2-98, as amended by Revenue Regulations Nos. 6-2001. In addition thereto, such sale shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, 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. (BIR Ruling No. DA-013-05 dated January 19, 2005) 3. The Deed of Partition to be executed by the parties whereby they will allocate and distribute among themselves their respective shares in the Project (saleable lots, road lots, parks, easements, open spaces and other common areas) in exchange for their respective contributions, being without monetary consideration is not subject to income tax, withholding tax, value-added tax and documentary stamp tax. (BIR Ruling Nos. 207-92 dated July 16, 1992; 349-93 dated July 30, 1993; DA Ruling No. 025-95 dated January 11, 1995) 4. Conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable (Section 185, Regulations No. 26). The Deed of Partition is not in connection with a sale made to the joint venture partners. In fact, the purpose of the conveyance to the joint venture partners is the mere return of capital that each has contributed. Accordingly, the Deed of Partition to be executed by the parties whereby they will allocate and distribute among themselves their respective shares in the Project (saleable lots, road lots, parks, easements, open spaces and other common areas) in exchange for their respective contributions, being without monetary consideration is not subject to donor's tax imposed under Section 98 of the Tax Code of 1997. (BIR Ruling No. DA-219-06 dated April 7, 2006) 5. The transfer without monetary consideration by the joint venture partners of road lots, parks, easements, and open spaces situated in the project subject of the joint venture to the village association is exempt from the capital gains and donor's taxes. Since the above-mentioned transfer and conveyance of the subject real properties from the joint venture partners to the village association was made without any monetary consideration and is not in connection with a sale made to the village association, no income was generated by the joint venture partners and a fortiori, no creditable withholding tax is payable and collected. Thus, the Deed of Conveyance is not subject to the creditable withholding tax prescribed by Revenue Regulations No. 2-98, as amended, implementing Section 57 (B) in relation to Section 27 (A) and (D) (5), all of the Tax Code of 1997. (BIR Ruling No. DA-219-06 dated April 7, 2006) Conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable. (Section 185, Regulations No. 26). The Deed of Conveyance is not in connection with a sale made to the village association. In fact, the purpose of the conveyance to the village association of the subject properties is for the common enjoyment and safety of the subdivision homeowners. Accordingly, the transfer of the saleable lots, road lots, parks, easements, open spaces and other common areas by the Landowner to the Developer as the latter's share in the project without monetary consideration is not subject to donor's tax imposed under Section 98 of the Tax Code of 1997. (BIR Ruling No. DA-219-06 dated April 7, 2006) The conveyance of the land and common areas of the Project in favor of the village association being without monetary consideration and is not in connection with a sale made to the village association, no income was generated and a fortiori, no income and/or creditable withholding tax is payable and collectible. Since the said conveyance is not a sale, it is likewise not subject to VAT imposed under Section 106 of the Tax Code of 1997, as amended, neither will it be subject to the documentary stamp on sales or conveyance of real property imposed under Section 196 of the same Code. However, the notarial acknowledgment to said Deed of Conveyance is subject to documentary stamp tax of fifteen pesos (P15.00) pursuant to Section 188 of the Tax Code of 1997. (DA-040-2001 dated March 20, 2001, DA-194-06 dated March 28, 2006) 6. The ruling to be issued will authorize the Revenue District Officer (RDO) of the revenue district where the property is located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the transfer of the titles to the lots to be received by the above-named Landowners and Developer based on their respective allocations pursuant to the partition and to the village association without need of presentation of proof of payment of the capital gains tax or the creditable withholding tax, documentary stamp tax and value-added tax and/or donor's tax. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service