BIR Ruling [DA-057-03]

January 27, 2003 BIR RULING [DA-057-03] Sec. 22 (b) DA-048-2003 Lina Lavares Didulo Yam & Leviste-Avellana Law Offices Unit 2202 AsiaTower Paseo de Roxas corner Benavidez Street Makati City Attention: Atty. Jose Leonilo V. Didulo Gentlemen : This refers to your letter dated January 15, 2003, concerning your request for confirmation that: IHTASa 1. The Joint Venture Development and Marketing Agreement (the "JVDMA") entered into by and between KAWAYAN COVE CORPORATION ("LANDOWNER") and EDGE PROPERTIES DEVELOPMENT CORPORATION ("DEVELOPER") shall not give rise to a separate taxable Joint Venture within the meaning of Section 22(b), in relation to Section 27(a) of the Tax Code of 1997. The JVDMA is subject only to the documentary stamp tax of P15.00 imposed on the notarial acknowledgment under Section 188 of the Tax Code, as amended. 2. The LANDOWNER's contribution to the Joint Venture of parcels of land (collectively referred to in the JVDMA as the "PROPERTY") for development into an upscale residential subdivision, is not subject to income tax and value-added tax presumed to have been realized from the sale, exchange or other disposition of real property because the contribution is not a transfer made in the course of business but is only a contribution of capital to the Joint Venture. 3.3.1 The allocation and distribution of saleable subdivided lots to the LANDOWNER and the DEVELOPER in consideration of their respective capital contributions to the Joint Venture on the basis of 40% to the LANDOWNER and 60% to the DEVELOPER, merely serve to accomplish the return of capital to the co-venturers, are not taxable events, and thus, are not subject to income tax, withholding tax and/or capital gains tax. The allocation and distribution of the saleable subdivided lots to the LANDOWNER and the DEVELOPER in consideration of their capital contributions to the Joint Venture, is not in the nature of "sales, barters, exchanges and leases of goods and properties, rendering of services" as defined under Section 105 of the 1997 Tax Code and is thus not subject to value-added tax. 3.2 The allocation and distribution of the saleable subdivided lots to the LANDOWNER and the DEVELOPER partakes of the nature of dissolution of co-ownership over real property and merely identifies the particular lost which pertain to each of the co-venturers. The issuance in their respective individual names of Transfer Certificates of Title (TCTs) to the saleable subdivided lots that comprise their respective 40% and 60% allocations, is but a formality of such dissolution. Therefore, the allocation, distribution, and titling of 40% and 60% of the saleable subdivided lots in favor of the LANDOWNER and the DEVELOPER, respectively, are not taxable events, and are not subject to income tax, expanded withholding tax and VAT. It is whenever the Joint Venture partners sell their respective saleable subdivided lots to third parties that income tax, expended withholding tax, and value added tax will be payable ( BIR Ruling Nos. DA-140-03-08-00 citing BIR Ruling No. 010-96 dated January 23, 1996 ). 4. The allocation to the co-venturers of their respective ownership interests or shares in the Areas Reserved for Future Development and the improvements and facilities to be constructed/installed on portions thereof, whether by causing the Transfer Certificates of Title (TCT's) to/of the Areas Reserved for Future Development to be issued and registered in the name of the LANDOWNER with the annotation that a 60% ownership interest belongs to the DEVELOPER, or jointly in the names of the LANDOWNER and the DEVELOPER on the basis of a 40% share for the LANDOWNER and a 60% share for the DEVELOPER, is still not subject to income tax, expended withholding tax, and value added tax, for the reason that such allocation of ownership interests or shares constitutes part of the total return of capital to the co-venturers. 5. The sale, conveyance, or disposition to third parties of (a) the saleable sub-divided lots and (b) the LANDOWNER's and the DEVELOPER's respective 40% and 60% ownership interests in (percentage shares of) the Areas Reserved for Future Development and the improvements and facilities and thereon, shall be subject to income tax, expended withholding tax, documentary stamp tax, and value added tax. The said taxes shall be payable to the BIR by the LANDOWNER or the DEVELOPER whichever of them is the owner of the (a) saleable subdivided lot, or (b) ownership interest in (percentage share of) an Area Reserved for Future Development and the improvements and facilities thereon, that has been sold, conveyed, or disposed of to a third party. 6. The transfer to the homeowner's association of the title and management of the Common Areas inclusive of the improvements and facilities constructed/installed thereon, shall not be subject to income tax, creditable withholding tax, value added tax nor shall it be subject to the documentary stamp tax, because the transfer shall be without monetary consideration and shall merely be the formal fulfillment of the commitment by the Joint Venture partners to the lot buyers and homeowners, in consonance with government policy. The facts as represented are as follows: 1. The LANDOWNER is a corporation duly organized and existing under the laws of the Republic of the Philippines. It is the registered owner of several parcels of land located in Nasugbu, Batangas covering an aggregate area of approximately 606,028 square meters collectively referred to herein as the "PROPERTY". 2. On January 14, 2003, the DEVELOPER, a domestic corporation organized and existing under the Philippine laws, entered into a Joint Venture Development and Marketing Agreement ("JVDMA") hereto attached as Annex "A", with the LANDOWNER. The JVDMA contains the entire understanding between the Parties and supersedes any prior understanding and/or agreement between them with regard to the PROPERTY. No previous representation, agreement, arrangement or understanding oral or written between the Parties relating to the PROPERTY, shall have any further force and effect unless expressly incorporated, acknowledge, or confirmed in the JVDMA. 3. The Parties have agreed to form an unincorporated Joint Venture for the development of the PROPERTY into an upscale residential subdivision and beach club, with the LANDOWNER contributing the PROPERTY and the DEVELOPER contributing the organization and the required financial resources for the construction and development works, as their respective capital contributions to the Joint Venture. 4. The Parties have also agreed that: 4.1 The saleable subdivided lots (individual residential lots, on each of which only a single detached house or residence may be built) shall be distributed or allocated on the basis of 40% to the LANDOWNER and 60% to the DEVELOPER. The 40% of the saleable subdivided lots that comprise the LANDOWNER's allocation shall be titled in the LANDOWNER's name and the 60% of the saleable subdivided lots that comprise the DEVELOPER's allocation shall be titled in the DEVELOPER's name. 4.2 The Transfer Certificates of Title (TCT's) to/of the Areas Reserved for Future Development (a few big subdivided lots, each identified in the DEVELOPER's SITE DEVELOPMENT PLAN as "Area Reserved for Future Development", which may be allowed to accommodate more than one residence and/or such complementary facilities and amenities as will enhance the quality of life of the community; or which may be further cut up into saleable subdivided lots on each of which only a single detached house or residence may be built) shall be in the name of the LANDOWNER but shall bear the annotation that a 60% ownership interest belongs to the DEVELOPER, or shall at the DEVELOPER's option be placed in the names of the LANDOWNER and DEVELOPER jointly, on the basis of a 40% share for the LANDOWNER and a 60% share for the DEVELOPER. Whenever any of the Areas Reserved for Future Development is in the future cut up into saleable subdivided lots, 40% of the saleable subdivided lots derived from the cutting up shall be titled in the name of the LANDOWNER and 60% in the name of the DEVELOPER. The DEVELOPER shall execute all necessary documents needed to confirm that the ownership of the improvements and facilities that the DEVELOPER shall pursuant to the JVDMA construct/install on those portions of the Areas Reserved for Future Development that are earmarked for the beach club, shall pertain jointly to the LANDOWNER and the DEVELOPER, with the former owning a 40% share and the latter a 60% share, of the said improvements and facilities. 4.3 The TCT's to/of the Common Areas (areas identified in the DEVELOPER's SITE DEVELOPMENT PLAN as "Road" or "Open Space", and any other areas the DEVELOPER may designate as being for the common use and enjoyment of the lotbuyers and homeowners, including the facilities and improvements the DEVELOPER shall construct/install thereon) shall be in the LANDOWNER's name until such time as the Common Areas are turned over to the homeowner's association without any monetary consideration. 5. The Parties have also agreed that: 5.1 All real estate taxes and other assessments on the PROPERTY, which are outstanding and payable as of the date of the execution of the JVDMA, shall be borne solely by the LANDOWNER. From the date of the execution of the JVDMA up to the time titles to the individual saleable subdivided lots are generated, real estate taxes and assessments that may accrue on the PROPERTY shall be shared on a 40%/60% basis by the LANDOWNER and the DEVELOPER. Thereafter, the LANDOWNER and the DEVELOPER shall be separately of individually responsible for the taxes and assessments on the lots comprising their respective 40% and 60% allocations of the saleable subdivided lots. 5.2 Real estate taxes and other assessments on the Areas Reserved for Future Development and on the improvements and facilities that the DEVELOPER shall pursuant to the JVDMA construct/install thereon, shall be shared on the basis of 40% and 60% by the LANDOWNER and the DEVELOPER respectively. Whenever any of the said Areas Reserved for Future Development is further cut up into saleable subdivided lots, the LANDOWNER and the DEVELOPER shall become individually responsible for the real estate taxes and other assessments on the individual lots comprising their respective 40% and 60% allocations of the saleable subdivided lots derived from the cutting up. EDIaSH 5.3 Real estate taxes and other assessments on the lands, facilities, and improvements comprising the Common Areas shall be shared on the basis of 40% and 60% by the LANDOWNER and the DEVELOPER respectively, until such time as the Common Areas are turned over to the homeowner's association without any monetary consideration. 5.4 Registration fees, transfer tax, if any, and document stamp tax, if any, payable upon the transfer to the DEVELOPER of title to the lots comprising its 60% share of the subdivided residential lots, shall be paid by the DEVELOPER. 5.5 Registration fees, transfer tax, and documentary stamp tax, if any, and incidental expenses necessary for the issuance of TCT's covering the Areas Reserved for Future Development and the Common Areas shall be paid by the LANDOWNER and DEVELOPER, on the basis of the LANDOWNER and the DEVELOPER bearing 40% and 60% respectively, of the said fees, taxes, and expenses. 5.6 5.6.1 The LANDOWNER shall be individually responsible for remitting to the BIR the value added tax (VAT), income tax, and applicable withholding taxes on the sale to a third party, of: (a) any lot that forms part of the LANDOWNER's allocation of the saleable subdivided lots; or (b) the LANDOWNER's ownership interest in (percentage share of) any Area Reserved for Future Development that is sold without being cut up into saleable subdivided lots. 5.6.2 The DEVELOPER shall be individually responsible for remitting to the BIR the VAT, income tax, and applicable withholding taxes on the sale to a third party, of: (a) any lot that forms part of the DEVELOPER's allocation of the saleable subdivided lots; or (b) the DEVELOPER's ownership interest in (percentage share of) any Area Reserved for Future Development that is sold without being cut up into saleable subdivided lots. 5.7 All other taxes and expenses not stipulated or provided for in the JVDMA, that are payable upon the sale to a third party of: a saleable subdivided lot; or an ownership interest in (percentage share of) any Area Reserved for Future Development that is sold without being cut up into saleable subdivided lots; shall be shouldered by the Party, either LANDOWNER or DEVELOPER, which owns the particular lot or ownership interest (percentage share) that has been sold. 5.8 The LANDOWNER and the DEVELOPER shall each separately maintain its own books of accounts. 6. The LANDOWNER has appointed the DEVELOPER as the LANDOWNER's attorney-in-fact and exclusive marketing and selling agent for the sale of: (a) all the LANDOWNER's saleable subdivided lots except those which the LANDOWNER does not intend to sell; and (b) the LANDOWNER's ownership interest in (percentage share of) such Areas Reserved for Future Development as the LANDOWNER and DEVELOPER may decide to sell without cutting up into saleable subdivided lots. A Marketing and Selling Commission shall be payable by the LANDOWNER to the DEVELOPER, equal to: (a) 12-1/2% of the selling price (net of discounts but inclusive of VAT and Creditable Withholding Tax) of every saleable subdivided lot allocated to the LANDOWNER that is sold to a third party buyer by DEVELOPER, and (b) 10-1/2% of the selling price (net of discounts but inclusive of VAT and Creditable Withholding Tax) of LANDOWNER's ownership interest in (percentage share of) every Area for Future Development which without being cut up into saleable subdivided lots, is sold to a third party buyer by the DEVELOPER on behalf of the LANDOWNER pursuant to a decision to sell arrived at by the parties. In reply, please be informed that your opinion is hereby confirmed as follows: 1. The JVDMA executed by the LANDOWNER and DEVELOPER described above is an agreement between the parties to provide land and fund the cost of construction and development works for an upscale residential subdivision project, and is neither a contract of sale over real property nor an instrument which conveys title to real property. Hence, no income tax or documentary stamp tax (DST) is due upon the execution of the JVDMA. (Section 186 of Revenue Regulations No. 26). However, the notarial acknowledgment on the JVDMA is subject to the DST on certification pursuant to Section 188 of the 1997 Tax Code. ( BIR Ruling No. DA-067-04-05-02 citing BIR Ruling No. DA-247-2001 dated November 27, 2001 ) EHcaDT Section 22(B) of the 1997 Tax Code, provides: "(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 partnership ' 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." From the foregoing definition of a corporation, we confirm your opinion that the JVDMA executed between the parties does not give rise to a taxable Joint Venture. The parties to a Joint Venture agreement may file separate income tax returns for their net revenue for the above-mentioned project less their respective proportionate share in the Joint Venture expenses since the Joint Venture is not embraced within the meaning of the term "corporation", hence, not subject to the corporate income tax imposed under Section 27(A) of the 1997 Tax Code. ( BIR Ruling No. DA-067-04-05-02 citing BIR Ruling No. 002-97 dated January 14, 1997 ) 2. The contribution of the LANDOWNER to the Joint Venture in the form of real property is not subject to income tax and value-added tax imposed under Sections 27(A) and 105 of the 1997 Tax Code, respectively. The LANDOWNER did not convey or transfer its ownership or interest over the PROPERTY when it contributed the PROPERTY to the Joint Venture but merely pooled the PROPERTY into a common fund together with the DEVELOPER. The conveyance of parcels of land by the LANDOWNER is but its capital contribution to the Joint Venture and therefore, not a taxable event that will give rise to the payment of regular income tax and creditable withholding tax. (BIR Ruling DA-067-04-05-02 citing BIR Ruling Nos. DA-247-2001; DA-262-2001, DA-262-2001) The contribution of the PROPERTY by the LANDOWNER to the Joint Venture is likewise not subject to VAT. 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 the VAT imposed in Sections 106 to 108 of the same Tax Code. But by contributing the PROPERTY as capital, the LANDOWNER does not sell, barter, exchange, lease nor import goods or properties, nor render services, and therefore the contribution of the PROPERTY by the LANDOWNER to the Joint Venture is not a transaction subject to VAT. ( BIR Ruling DA-067-04-05-02 citing BIR Ruling No. DA-262-2001 ) 3.3.1 The allocation and distribution of the saleable subdivided lots to the LANDOWNER and the DEVELOPER, respectively, in consideration of their respective equity contributions and in accordance with the allocation percentages as stipulated in the JVDMA, is not subject to income tax, withholding tax, documentary stamp tax and VAT since the aforesaid allocation and distribution constitute a mere return of the capital contributed by them to the Joint Venture. ( BIR Ruling Nos. DA-067-04-05-02; DA-015-02-04-02 ) 3.2 The allocation and distribution of saleable subdivided lots to the Joint Venture partners partakes of the nature of dissolution of co-ownership over real property, and merely identifies which lots pertain to each of the co-venturers. The eventual issuance of Transfer Certificates of Title (TCT's) in their respective individual names is therefore a mere formality of such dissolution, and is not a taxable event. Hence, the titling of 40% of the saleable subdivided lots in favor of the LANDOWNER and the titling of 60% of the saleable subdivided lots in the name of the DEVELOPER, as stipulated in the JVDMA, is not subject to income tax, expanded withholding tax and VAT. The taxable event will rise when the Joint Venture partners start selling their duly received developed lots/units to third parties. ( BIR Ruling No. DA-140-03-08-00 citing BIR Ruling No. 010-96 dated January 23, 1996 ) 4. The allocation to the co-venturers of their respective ownership interests or shares in the Areas Reserved for Future Development and the improvements and facilities to be constructed/installed on portions thereof, whether by causing the Transfer Certificates of Title (TCT's) to/of the Areas Reserved for Future Development to be issued and registered in the name of the LANDOWNER with the annotation that a 60% ownership interest belongs to the DEVELOPER, or jointly in the names of the LANDOWNER and the DEVELOPER on the basis of a 40% share for the LANDOWNER and a 60% share for the DEVELOPER, is still not subject to income tax, expanded withholding tax, and value added tax, for the reason that such allocation of ownership interests or shares constitutes part of the total return of capital to the co-venturers. In BIR Ruling No. 015-02-04-02 citing BIR Ruling Nos. 207-92 dated July 16, 1992; 349-93 July 30, 1993; DA Ruling No. 025-95 dated January 11, 1995 , the BIR ruled that where the parties defer its respective right to receive a 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. The JVDMA and the therein stipulated allocation, distribution, and titling transactions in favor of the LANDOWNER and the DEVELOPER, are not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 because the allocation, distribution, and titling of saleable subdivided lots and the allocation of ownership shares in and the issuance and registration of TCT's to/of Areas Reserved for Future Development inclusive of the improvements and facilities that shall be constructed/installed on portions thereof, are without monetary consideration, are not in connection with a sale, and are merely for the purpose of accomplishing the return of the capital which each co-venturer contributed. However, the acknowledgment to said JVDMA is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. ( BIR Ruling No. 069-04-15-02 citing BIR Ruling No. DA-240-2001 dated November 16, 2001 ) 5. The subsequent sale to third parties by the co-venturers of: (a) the saleable subdivided lots allocated to each of them; and (b) their respective ownership interests in (percentage shares of) the Areas Reserved for Future Development and the improvements and facilities thereon; is subject to the regular taxes under the Tax Code. Thus, the gain that may be realized by either co-venturer from such sale or disposition will be subject to the regular income tax rate provided under Section 27(A) of the 1997 Tax Code and to the creditable withholding tax under Revenue Regulations No. 2-98, as amended. Moreover, said sale or disposition shall be subject to the documentary stamp tax imposed under Section 196 of the 1997 Tax Code 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 Nos. DA-067-04-05-02 and DA-015-02-04-02 ) 6. The deed or transaction transferring to the homeowner's association the title and management of the Common Areas inclusive of the improvements and facilities constructed/installed thereon, will not be subject to income tax, nor to creditable withholding tax, nor to VAT, nor will it be subject to the documentary stamp tax imposed under Section 196 of the same Code, because conveyances of real property not in connection with a sale and without monetary consideration, to trustees or other similar persons are not taxable. But the notarial acknowledgment to said deed or transaction is subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code of 1997. ( BIR Ruling DA-069-04-15-02 citing BIR Ruling No. DA-240-2001 ) This ruling will authorize the Revenue District Officer (RDO) of the revenue district where the PROPERTY is located to issue the corresponding Tax Clearance Certificate (TCL) upon subsequent sale or disposition by the co-venturers of: (a) the individual/subdivided lots allocated and distributed to each of them, and (b) their respective ownership interests in (percentage shares of) the Areas Reserved for Future Development and the improvements and facilities thereon. 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. HAICTD Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service