SGV & Co.

February 22, 2007 BIR RULING [DA-114-07] Sec. 22 (B) Joint Venture SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. R.C. Vinzon Gentlemen : This refers to your letter dated January 22, 2007 requesting confirmation of your opinion on the following issues viz .: 1. The joint venture by and between Sucat Land Corporation (the "Landowner") and Landco Pacific Corporation (the "Developer") is not subject to the regular corporate income tax under Section 27 (A) of the Tax Code of 1997, as amended; 2. The allocation and distribution of the net sellable areas 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 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 a specific allocation to 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; IaAHCE 3. The transfer of the parcels of land by the Landowner is also 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, 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; 4. The Project Partition whereby the Landowner and Developer will allocate unto each other their shares in the net sellable areas in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, income tax and any withholding tax because the allocation is made without monetary consideration and is not in connection with a sale. The partition is made merely to segregate the net sellable areas between the parties, as the return of the capital which each has contributed. However, the acknowledgment to said Project Partition is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997, as amended; TIDaCE 5. Upon subsequent disposition by the co-venturers of the net sellable areas 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 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; and 6. The conveyance of the common areas in the condominium project to the Condominium Corporation and the conveyance of the utilities and amenities in the complex that are not included in the common areas to the Association were made without monetary consideration and is not in connection with a sale made to the Condominium Corporation and 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 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 the documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code of 1997, as amended. It is represented that a Joint Venture Agreement (JVA) for the development of a condominium complex was entered into by Landco Pacific Corporation as Developer and Sucat Land Corporation as Landowner. ASTcEa The Landowner is a corporation organized and existing under the laws of the Philippines. It is the absolute and registered owner of five (5) parcels of land located at Muntinlupa City, Metro Manila with a total area of Ninety Seven Thousand Five Hundred Four (97,504) square meters, more or less, covered by Transfer Certificates of Title Nos. 201139, 201140, 206622, 207918 and 3332 of the Registry of Deeds for the City of Muntinlupa. The Developer is a corporation organized and existing under the laws of the Philippines. It has the experience, personnel, equipment and capital necessary to develop the Property into a mixed residential/commercial condominium complex. The salient features of the JVA are as follows: "Article IV AGREED SHARING "4.1 For and in consideration of their respective contributions to the Joint Venture and their obligations hereunder, the LANDOWNER shall be entitled to the LANDOWNER's Share (as hereinafter defined) and the DEVELOPER shall be entitled to the DEVELOPER's Share (as hereinafter defined). "4.2 From the total completed and disposable Units and other disposable areas of the Complex, the Parties agree to share in the following proportion: EHaDIC a) On the basis of a Floor Area Ration ("FAR") of 2.0 to 3.0 for the Complex, the LANDOWNER shall be entitled to twenty percent (20%) of the net sellable areas of the Complex. This shall include any and all rights and/or privileges from which income or revenues may be realized (collectively referred to as the "Net Sellable Areas") as determined and agreed upon by the Parties hereto (hereinafter, the "LANDOWNER's Share"); and b) The DEVELOPER shall be entitled to the remaining eighty percent (80%) of the net sellable areas of the Complex (hereinafter the "DEVELOPER's Share"). For purposes of this Agreement, the term "Floor Area Ratio" or "FAR" shall be generally understood to mean the ratio between the gross floor area of a building or buildings, exclusive of parking spaces within the building/s and any parking buildings, and the area of the lot on which it/they stand/s, and shall be more particularly defined in the Master Development Plan (as hereinafter defined). (Hereinafter the above allotment of Net Sellable Areas shall be referred to as the "Agreed Sharing.") Prior to proposals on the Initial Project and each Subsequent Project as defined below, the parties shall meet to determine the Net Sellable Areas to which the Agreed Sharing shall apply. HTCAED "4.3 Pursuant to the Agreed Sharing, the Parties shall allocate the Units and the corresponding parking spaces among themselves following the method of allocation described in ANNEX "B" hereof and upon completion of such allocation, the Parties shall execute a Supplement to this Agreement, which Supplement shall state the Units allocated to each Party and form an integral part hereof. "4.4 The Parties shall enter into separate agreement on the disposition and/or ownership of all areas of the Property designated as commercial area under the Master Development Plan (as hereinafter defined) or designated as such by the Parties (the "Commercial Areas"). "4.5 Titles over common areas (the "Common Areas") shall be transferred to and turned over to the Condominium Corporation which shall be formed by the Parties in accordance with Article VII hereof. "Common Areas" shall mean all of the parts of the Areas, which under the terms of the Master Deed to be agreed upon by the Parties, are areas of the Complex for which individual certificates of title are not issued and which are reserved for common use or necessary or convenient to the existence, maintenance and safety of the Complex and may include, but need not be limited to, the Property, all stairs or elevators, common utility space and areas, all driveways, all central and appurtenant equipment and installation for utility services and all other parts and facilities of the Complex. "4.6 Titles over utilities and amenities in the Complex that are not included in the Common Areas (the "Utilities") shall be transferred to and turned to the Association (as hereinafter defined) or retained by the Parties or any of them, as may be further agreed upon by the Parties." In reply, please be informed that this Office hereby confirms your opinion as follows: 1. Pursuant to Section 22 (B) of the Tax Code of 1997, as amended, 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. DCATHS P.D. No. 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 complete 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, 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, 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 No. DA-194-06 dated March 28, 2006) 2. The allocation of the net sellable areas of the complex between the Landowner and Developer, in consideration of their respective contributions, as stipulated in the JVA is not a taxable event and is not subject to income tax or any withholding 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 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. (BIR Ruling No. DA-192-2001 dated October 17, 2001) 3. The transfer is also 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, 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. Hence, by contributing its parcels of land, the Landowner, neither sells, barters, exchanges goods, property nor renders services to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001) 4. The Partition Agreement whereby the Landowner and Developer will allocate unto each other their shares in the net sellable areas of the complex in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, income tax and any withholding tax because the allocation is made without monetary consideration and is not in connection with a sale. The partition is made merely to segregate the net sellable areas between the parties, as the return of the capital which each has contributed. However, the acknowledgment to said Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. DA-194-06 dated March 28, 2006) 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 Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001. Moreover, such sale shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, 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. TAHIED 5. The conveyance of the common areas of the Project in favor of the condominium corporation and the conveyance of the utilities and amenities in the complex that are not included in the common areas to the Association being 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 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 acknowledgement to said Deed of Conveyance is subject to documentary stamp tax of fifteen (P15.00) pursuant to Section 188 of the Tax Code of 1997, as amended. (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 partition and (b) transfer of the titles to the Condominium Corporation and 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. 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. aIcDCH Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service