BIR Ruling [DA-080-99]

February 9, 1999 BIR RULING [DA-080-99] Robinsons Homes, Inc. 2nd Level, Robinsons Galleria Edsa Entrance, Edsa corner Ortigas Avenue Quezon City Attention: Arch . Prudencio C . Castillo Senior Vice President & General Manager Gentlemen : This refers to your letter dated July 9, 1998 requesting for a ruling on the tax implications of the Joint Venture Agreement (JVA) entered into by and between Robinsons Homes, Inc. (RHI), as Developer and EEI Realty Corporation (EEIR), as Owner for the development of several parcels of land located at Barangay Tanauan, Tanza, Cavite into a residential subdivision and/or other land uses. LibLex It is represented that EEIR is the absolute and registered owner of twenty two (22) parcels of land located in Barangay Tanauan, Tanza, Cavite with an aggregate area of 727,936 square meters and covered by TCT Nos. T-655000 to T-655016, T-22664, T-22777, T-687393, T-687394 and T-695516 (Property) all issued by the Register of Deeds of Cavite; that the Owner acknowledges the financial and technical capability of the Developer to develop the property into a residential subdivision and/or other land uses where the primary sources would be government financing like SSS, GSIS, HDMF and others; that the Developer having the financial and technical capability for the development work desired by the Owner for the property, has agreed to undertake the development of the property into residential subdivision and/or other land uses, the marketing of the same and in general, the management and operation thereof; that on April 24, 1998, RHI and EEIR entered into a JVA for the development of the said property into residential subdivision; that essential features of the JVA are as follows: 1) That the expenses for the development works, re-survey,' consolidation and subdivision of titles and construction of housing units are for the account of RHI. Real estate taxes on the properties are borne by both parties in accordance with their sharing arrangements. Titles consolidated and re-subdivided shall still be in the name of EEIR; 2) RHI shall have exclusive marketing rights over all the saleable lots of the Project which includes, but is not limited to the determination of marketing policies, pricing, terms and conditions of sale, restrictions, documentation, collection of proceeds, etc; and 3) RHI shall be entitled to 60% of the saleable lots while RHI shall be entitled to 40% in the altered site development plan as prepared by RHI. Before any selling is done, the parties shall agree on the specific lots to be assigned to each of them. RHI owns exclusively the housing units it will construct regardless of whether the lots on which the houses are built pertain to EEIR or RHI. cdta Based on the foregoing representations, you now request confirmation on the following issues: "1. The Joint Venture Agreement entered into by and between RHI and EEIR does not create a separate taxable entity; "2. The allocation and distribution of the saleable lots to RHI and EEIR is not subject to income tax, expanded withholding tax, value-added tax and documentary tax; "3. The sale by RHI or EEIR of their respective shares in the saleable lots to third parties is generally subject to income tax, expanded withholding tax (unless exempt under Republic Act No. 7279 on socialized housing and similar acts), documentary stamp tax and value-added (unless exempt under Section 109(w) of the Tax Reform Act); "4. The collection of sales proceeds and remittance of expanded withholding tax, value-added tax and documentary stamp tax may be in the name of EEIR or RHI by virtue of the marketing provision of the JVA. Accordingly, RHI may execute the Deed of Absolute Sale in its name as regards its share in the saleable lots notwithstanding the fact that the titles to the property are still in the name of EEIR; and "5. EEIR or RHI can secure the Tax Clearance/Certificate Authorizing Registration from the Regional District Office of their respective principal office/place of business with regard to the sale of developed units pertaining to their respective shares." In reply, 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. cdti 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 is of the opinion as it hereby holds that the Joint Venture Agreement entered into by RHI and EEIR is 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 saleable lots to RHI and EEIR in consideration of their respective contributions, as stipulated in the Joint Venture 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. Moreover, in the event that RHI as developer decides to transfer the title to the property representing its share in the saleable lots in its name, such transfer is still not subject to the aforementioned taxes. 3. However, upon subsequent sale by RHI or EEIR of their respective shares in the saleable lots to third parties, the gain that may be realized by them from such sale will be subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997 and to the creditable withholding tax under Revenue Regulations No. 2-98 and to the value-added tax and documentary stamp tax imposed under Sections 106 and 196 both of the Tax Code of 1997. (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) 4. Considering that the Joint Venture Agreement provides that RHI being the developer shall have exclusive marketing rights over all saleable lots of the property. The term "marketing" includes but is not limited to the determination of marketing policies, pricing, terms and conditions of sale, restrictions to be annotated on the titles of lots, documentation and collection of proceeds of sales. Accordingly, by virtue of the marketing agreement, RHI may execute the Deed of Absolute Sale in its name in order to transfer title to the property in the name of the buyers with regard to its share in the saleable lots notwithstanding the fact that the titles to the properties may still be in the name of EEIR. Such being the case, the creditable withholding tax, documentary stamp tax and value-added tax paid thereon may be credited in the name of RHI. 5. This will authorize the Revenue District Office (RDO) where RHI or EEIR is registered to issue the corresponding Tax Clearance Certificate (TCL) with regard to the sale of developed units pertaining to their respective shares upon presentation of the evidence of payment of 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. llcd Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue