Shang Properties, Inc.

February 1, 2008 BIR RULING [DA-065-08] PD 929; DA-194-06; 240-2001; 114-07; 040-2001 Shang Properties, Inc. Level 5, Shangri-La Plaza, EDSA Corner Shaw Boulevard Mandaluyong City Attention: Federico G. Noel, Jr. Corporate Secretary Gentlemen : This refers to your letter dated January 21, 2008, requesting confirmation of your opinion on the following issues: 1. The joint venture by and between Shang Properties, Inc. (SPI) (formerly EDSA Properties Holdings Inc. (the "Landowner") and The Shang Grand Tower Corporation (TSGTC) (the "Developer") is not subject to the Regular Corporate Income Tax (RCIT) Under Section 27 (A) of the 1997 Tax Code, as amended; 2. The assignment by the Landowner of its parcel of land is not a taxable event that will give rise to the payment of RCIT/creditable withholding tax, because the said assignment is merely a transaction to effect its capital contribution to the joint venture and not a taxable event. The transfer of the parcel of land by the Landowner is also not subject to Value Added Tax (VAT) since under Section 105 of the 1997 Tax Code, as amended, 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, as amended. Hence, by contributing its parcels of land, the Landowner, neither sells, barters, exchanges goods, property nor renders services to be subject to VAT; 3. The allocation and distribution of the Net Salable Area (NSA) of the project between the Landowner and Developer, in consideration for their respective contributions, is not a taxable event and is not subject to income tax, withholding tax, value added tax and Documentary Stamp Tax (DST) because the allocation is a mere return of capital that each has contributed. Accordingly, the Supplemental Agreement whereby the Landowner and Developer will allocate unto each other their shares in the NSA in consideration of their respective contributions is not subject to the DST imposed under Section 196 of the 1997 Tax Code, as amended, income tax and any withholding tax because the allocation is made without monetary consideration and is not in connection with a sale. However, the acknowledgment to said Supplemental Agreement is subject to the DST pursuant to Section 188 of the 1997 Tax Code, as amended, in the amount of P15.00; CaAIES 4. Upon subsequent disposition by the co-venturers of the NSA 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. Moreover, such sale shall be subject to the DST imposed under Section 196 of the 1997 Tax Code, as amended, based on the gross selling price or fair market value of the properties, whichever is higher. Furthermore, the said sale shall be subject to VAT; and 5. The conveyance of the common areas in the condominium project to the Condominium Corporation is made without monetary consideration and is not in connection with a sale made to the Condominium Corporation, 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 1997 Tax Code, as amended. Neither will it be subject to the DST on sales or conveyance of real property imposed under Section 196 of the same Code. However, the notarial acknowledgment to the related Deed of Conveyance is subject to the DST of P15.00 pursuant to Section 188 of the 1997 Tax Code, as amended. It is represented that a Memorandum of Agreement (MOA) for the development of a high-rise residential condominium building to be known as "The St. Francis-Shangri-La Place", (hereinafter the "Project") was entered into by SPI as Landowner and TSGTC as Developer. The Landowner is a corporation organized and existing under and by virtue of the laws of the Philippines. It is the registered owner of a parcel of land covered by Transfer Certificate of Title (TCT) No. 20783 issued by the Register of Deeds of Mandaluyong City, described as Lot No. 4, Psd-00-068146 located along St. Francis Street corner Internal Road, Shangri-La Plaza Complex, Mandaluyong City, consisting of an aggregate area of Five Thousand Two Hundred Fifty Seven and 50/100 (5,257.50) square meters. The Developer is a corporation organized and existing under and by virtue of the laws of the Philippines. It has the funds necessary to defray the construction cost thereof as well as technical expertise in the management of the same. The salient features of the MOA are as follows: "Section 3. Allocation of the Project . 3.1 Intention . It is the intention of the Parties to allocate the resulting units in the Project between them, with each party taking ownership and possession of its respective allocated units (hereinafter the "Allocated Units"), with full power and discretion on the disposition of the same, subject only the pertinent conditions hereunder contained. 3.2 Allocation of NSA. The allocation between the Parties of the NSA shall be at the ratio of twenty percent (20%) to LANDOWNER and eighty percent (80%) to DEVELOPER subject to adjustment based on mutual agreement of the Parties. The actual designation of the Parties' respective Allocated Units shall be determined upon completion of the final plans and shall be incorporated in a supplemental agreement to be executed by the Parties. 3.3 Allocation of Parking Slots . The Parties agree that Seventy Five (75) contiguous parking slots shall be allocated to the LANDOWNER. The allocation of the remaining parking slots net of the 75 slots allocated to LANDOWNER, shall be eighty percent (80%) to DEVELOPER and twenty percent (20%) to LANDOWNER subject to adjustment based on mutual agreement of the Parties. The actual designation of the parking slots shall be determined upon completion of the final plans and shall be incorporated in a supplemental agreement to be executed by the Parties. CAaDSI 3.4 Common Areas . The Common Areas shall refer to any area or facility of the Project other than the NSA, which is used, maintained and operated for the common benefit of the NSA, including, but not limited to, the main lobby, elevator and elevator shafts, chases, stairways, fire escapes and exits, driveways, areas for all utility rooms including the utilities found therein, and all other areas provided for the benefit of all occupants of the Project. The Common Areas shall be owned, managed and operated by the Condominium Corporation." Moreover, a Supplemental Agreement dated October 23, 2007 was entered into by and between SPI and TSGTC to amend certain provisions of the MOA and to designate the Parties' respective units in the Project. The relevant provisions of the Supplemental Agreement are quoted below: "Section 2. Allocation of Units . The Parties have agreed to allocate the units of the Project, as follows: LANDOWNER DEVELOPER TOTAL Condominium 82 1,014 1,096 Area (sq.m) 9,779.90 73,496.80 83,276.70 Commercial 4 4 Area (sq.m) 409.50 409.50 Storage rooms 43 143 186 Area (sq.m) 696.50 1,175.30 1,871.80 Parking 150 568 718 Area (sq.m) 1,875 7,100 8,975 "Section 3. Amendatory Clause . The provisions of the MOA, insofar as they are not consistent and/or not similar to this Agreement, are hereby deemed amended and/or superseded by this Agreement." In reply, please be informed that this Office hereby confirms your opinion as follows: 1. As a general rule, a joint venture, which is a form of partnership, is regarded as a "corporation" for income tax purposes pursuant to Section 22 (B) of the 1997 Tax C od e, as amended, which provides as follows: "(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) Presidential Decree (PD) No. 9 2 9 amended the definition of the taxable corporation as not to include joint venture formed for the purpose of undertaking construction projects on the basis of the following reasons: (1) Local contractors contribute substantially to the development program of the country; IADaSE (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 formed for the purposes of undertaking construction projects from the definition of a taxable corporation, the MOA entered into by and between the Landowner and the Developer is not subject to the corporate income tax under Section 27 (A) of the 1997 Tax C od e, as amended, 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 [DA-194-06] dated March 28, 2006) 2. The assignment by the Landowner of its parcel of land is not a taxable event that will give rise to the payment of RCIT/creditable withholding tax, because the said assignment is merely a transaction to effect its capital contribution to the joint venture and not a taxable event. (BIR Ruling [DA-192-2001] dated October 17, 2001; BIR Ruling [DA-325-07] dated June 1, 2007) . The transfer is also not subject to VAT since under Section 105 of the 1997 Tax C od e, as amended 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 C od e. Hence, by contributing its parcel of land, the Landowner, neither sells, barters, exchanges goods, property nor renders services to be subject to VAT. (BIR Ruling [DA-240-2001] dated November 16, 2001) 3. The allocation and distribution of the NSA between the Landowner and Developer, in consideration of their respective contributions, as stipulated in the MOA is not a taxable event and is not subject to income tax or any withholding tax, value added tax and Documentary Stamp Tax (DST) because the allocation is a mere return of capital that each has contributed. (BIR Ruling [DA-240-2001] dated November 16, 2001) 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). The Landowner and the Developer, both having contributed to the development of the aforementioned real property, did not realize any income upon the allocation of the NSA. Hence, the allocation of units arising from the Supplemental Agreement is not subject to income tax, and consequently, to withholding tax. The said allocation, likewise, is not subject to VAT. (BIR Ruling [DA-023-07] dated January 17, 2007) Accordingly, the Supplemental Agreement whereby the Landowner and Developer will allocate unto each other their shares in the NSA in consideration of their respective contributions is not subject to the DST imposed under Section 196 of the 1997 Tax C od e, as amended, income tax and any withholding tax because the allocation is made without monetary consideration and is not in connection with a sale. However, the acknowledgment to said Supplemental Agreement is subject to the DST pursuant to Section 188 of the 1997 Tax C od e, as amended, in the amount of P15.00. (BIR Ruling [DA-194-06] dated March 28, 2006) 4. It is understood however, that upon 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 RR No. 2 - 98, as amended by RR No. 6-2 00 1. Moreover, such sale shall be subject to the DST imposed under Section 196 of the 1997 Tax C od e, 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 [DA-14-07] dated February 22, 2007) EAIaHD 5. The conveyance of the common areas of the Project in favor of the condominium corporation is without monetary consideration and is not in connection with a sale made to the condominium corporation; accordingly, 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 1997 Tax C od e, as amended, neither will it be subject to the DST on sales or conveyance of real property imposed under Section 196 of the same C od e. However, the notarial acknowledgement to the related Deed of Conveyance is subject to DST of fifteen (P15.00) pursuant to Section 188 of the 1997 Tax C od e, as amended. (BIR Ruling [DA-040-2001] dated March 20, 2001) 6. 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) with regard to the (a) transfer of the titles to be received by the above-named Landowner and Developer based on their respective allocations pursuant to the allocation and (b) transfer of the titles to the Condominium Corporation 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. 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