Jimenez Gonzales Liwanag Bello Valdez Caluya & Fernandez

January 25, 2008 BIR RULING [DA-043-08] Jimenez Gonzales Liwanag Bello Valdez Caluya & Fernandez SOL Building, 112 Amorsolo Street, Legaspi Village Makati City Attention: Atty. Victoria T. Limkico and Atty. Dinah Rose C. Bala Gentlemen : This refers to your letter dated October 22, 2007 stating that your clients, Spouses Diosdado L. Cervantes and Cynthia M. Cervantes, Spouses Ponciano Jr. and Mila Gonzales, and Rufino G. Gonzales III are respectively the registered owners of several parcels of land located in Bancal, Guagua, Pampanga covered by TCT Nos. 256125-R, 256126-R, 275395-R, 275396-R, 615067-R, 336629-R with an aggregate area of 55,098 square meters; that on the other hand, JCMC Ville, Inc. is a corporation duly organized and existing under the laws of the Philippines and engaged in the business of developing prime subdivisions and other realty projects; that on October 6, 2007, the Parties entered into a Joint Venture Agreement (Agreement) to have their properties developed into a residential subdivision to be known as the JCMC Ville Subdivision; that the salient portions of the said Agreement are as follows: a. JCMC Ville, Inc. shall furnish all materials, equipment, labor and services in the development of the subject real properties owned by Spouses Cervantes, Spouses Gonzales and Rufino G. Cervantes III; b. Expenses for undertaking the subdivision development shall be shared pro-rata by the Parties in this proportion: Party Share Party Share JCMC Ville, Inc. 34.31% Spouses Cervantes 34.31% Spouses Gonzales 27.75% Rufino Gonzales III 03.63% c. The Parties shall share in the total saleable lots in proportion to and located in their respective lot areas as follows: Party Share JCMC Ville, Inc. 34.31% Spouses Cervantes 34.31% Spouses Gonzales 27.75% Rufino Gonzales III 03.63% d. All roads and open spaces shall be turned over to JCMC Ville, Inc. upon completion of the project but the Parties, their representatives and assigns shall have perpetual right to use the same free of charge; e. Upon release of the individual titles from the Register of Deeds to JCMC Ville, Inc. it shall, upon request of any of the Second, Third and Fourth Parties, immediately execute and deliver the corresponding Deed of Assignment in favor of said Parties so that the share/s of said Parties can already be registered in their names. Based on the foregoing representations, you now request confirmation of your opinion that 1. The joint venture agreement for the development of the above-mentioned real properties into residential subdivision, 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, as amended; 2. The allocation and distribution of the saleable lots to the Parties in consideration of their respective contributions, as stipulated in the joint venture agreement is not a taxable event, hence, is not subject to the regular corporate income tax under Section 27 (A) of the Tax Code, nor creditable withholding tax under Revenue Regulations No. 2-98, the value-added tax under Section 106 of the Tax Code, and the documentary stamp tax under Section 196 of the Tax Code, because allocation is a mere return of capital that each of the Parties has contributed to the Project; 3. The Deed of Partition to be executed by the parties whereby they allocate and distribute between them their respective shares in the Project in exchange for their respective contributions is without monetary consideration, hence, is not subject to value-added tax under Section 106 of the Tax Code, income/creditable withholding tax under Revenue Regulations No. 2-98, and the documentary stamp tax under Section 196 of the Tax Code; In reply thereto, please be informed that your opinion is hereby confirmed 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. It is to be emphasized, however, that P.D. 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 holds that the Agreement entered into by Parties and JCMC Ville, Inc. not subject to the corporate income tax under Section 27 (A) of the Tax Code of 1997. However, the co-venturers are separately subject to the regular corporate income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. 2. The allocation and distribution of the respective shares of the Parties in the Project consisting of Saleable lots in consideration of their respective contributions, as stipulated in the Agreement 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. 3. The Deed of Partition to be executed by the Parties whereby they allocate and distribute between them their respective shares in the Project in exchange for their respective contributions is without monetary consideration is not subject to value-added tax under Section 106 of the Tax Code of 1997, as amended by Republic Act No. 9337, as implemented by Revenue Regulations No. 16-2005, income tax/creditable withholding tax under Revenue Regulations No. 2-98, as amended, and to the corresponding documentary stamp tax prescribed in Section 196 of the Tax Code of 1997, as amended. However, upon subsequent sale by the Parties of their respective shares consisting of Units, the gain that may be realized by them from such sale will be subject to the regular corporate income tax under Section 27 (A) and to the creditable withholding tax under Revenue Regulations No. 2-98, as amended, and to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, and to the value-added tax imposed under R.A. No. 9337, as implemented by Revenue Regulations No. 16-2005, unless exempt under Section 109 (w), supra. (BIR Ruling Nos. 274-92 dated September 30, 1992; 010-96 dated January 23, 1996; BIR Ruling Nos. DA065-97 dated February 10, 1997; DA286-98 dated June 29, 1998) Finally, the joint venture or the party who undertakes the development of the project shall file an Annual Information Return and other returns required to be filed with the RDO where it is registered or required to be registered. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service