BIR Ruling [DA-131-02]

August 12, 2002 BIR RULING [DA-131-02] 22 (B), 27 (A), 196, 57 (B) DA-096-2000 Ayala Land, Inc. Tower One, Ayala Triangle Ayala Avenue, Makati City Attention: Atty. Ma. Angeli L. Ferrer Department Manager-Legal Department Gentlemen : This refers to your letter dated July 11, 2002 quoted as follows: "We respectfully request confirmation of our opinion that the (1) joint development and construction of a residential subdivision by Ayala Land, Inc. ("ALI") and Laguna Properties Holdings, Inc. ("LPHI") will not create a taxable joint venture within the meaning of Section 22(B) in relation to Section 27(A) of the National Internal Revenue Code of 1997 (the "Tax Code"), and (2) the allocation of their respective interests in the project, and the execution of the Deed of Partition to implement such allocation, is not a taxable event and is not subject to income/expanded withholding tax, value-added tax, and documentary stamp tax under Section 196 of the Tax Code. Background ALI is a corporation duly organized and existing under Philippine laws and is the owner in fee simple of parcels of land with an area of approximately 414,908 square meters located in Barangay Salawag, Municipality of Dasmarias, Province of Cavite and covered by Transfer Certificates of Title Nos. T-828037, T-828038, T-828039, T-828040, T-828041, T-828042, T-828043, T-828044, T-828045, T-828046, T-828047, T-828048, T-828049, T-828050, and T-828051 of the Registry of Deeds of Cavite, . . . . LPHI is a corporation duly organized and existing under Philippine laws and is engaged in the development of real estate. On June 20, 2002, ALI and LPHI (collectively, the "Parties") entered into a Joint Development Agreement (the "Agreement") for the joint development of the parcels of land owned by ALI into an integrated community with residential, recreational, and commercial components (the "Project"). The Project consists of the planning, construction and development of such parcels in phases and the marketing and sale of housing units and the lots on which they are constructed (the "Saleable Housing Units") and developed lots (the "Saleable Lots"). The specific terms of the Agreement are as follows: (a) ALI shall contribute the parcels of land that will constitute the entire land area of the Project (the "Project Land Area"). (b) LPHI shall finance the entire cost of planning and developing the Project Land Area by contributing the cash necessary for the development and construction of the entire Project, including the construction of housing units on lots specifically identified for such purpose. (c) In return for their respective contributions to the Project, ALI and LPHI shall receive as return of capital, whole Saleable Housing Units and Saleable Lots which constitute their respective allocations (the "Allocation") to be distributed as follows: (i) ALI shall be entitled to receive such number of Saleable Housing Units and Saleable Lots as may be equivalent to the following amount: Number of Saleable Housing Units Allocated to ALI= 2.5% x Gross Selling Price of each Saleable Housing Unit within the Project Land Area Number of Saleable Lots Allocated to ALI= 40% x Gross Selling Price of each Saleable Lot within the Project Land Area (ii) LPHI shall be entitled to receive such number of Saleable Housing Units and Saleable Lots as may be equivalent to the following amount: Number of Saleable Housing Units Allocated to LPHI= 75% x Gross Selling Price of each Saleable Housing Unit within the Project Land Area Number of Saleable Lots Allocated to LPHI= 60% x Gross Selling Price of each Saleable Lot within the Project Land Area (d) The actual distribution to ALI and LPHI of the Saleable Housing Units and Saleable Lots as their respective Allocations shall be effected through the execution of a Deed of Partition to segregate the Allocations between the parties for each phase of the Project. The Deed of Partition shall be executed without monetary consideration. Prior to the execution of such Deed of Partition, the Parties shall have a prorated interest in the Project on the basis of the pro rata allocation specified above. (e) After distribution of their respective Allocations, ALI and LPHI shall respectively maintain separate ownership of such allocated Saleable Housing Units and Saleable Lots and may sell or transfer the same to third parties independently of the other, and without pooling their profits and resources with the other party. LPHI shall be the sole marketing agent of ALI's allocated Saleable Housing Units an Saleable Lots." Based on the foregoing representation, you now request confirmation on the following issues: 1. The joint venture whereby ALI will contribute the Project Land Area and LPHI will contribute the cash for the development of the entire Project does not give rise to a taxable joint venture, hence, is not subject to corporate income tax pursuant to Section 22(B) in relation to Section 27(A) of the Tax Code. 2. The allocation and distribution of their respective shares in the Project consisting of Saleable Housing Units and Saleable Lots in consideration for their respective contributions to the joint venture 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, as amended, nor the value-added tax under Section 106 of the Tax Code because the 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 among them their respective shares in each phase of 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, as amended, and the documentary stamp tax under Section 196 of the Tax Code. 4. Consequently, the confirmation of this request will authorize the Revenue District Officer (RDO) of the revenue district where the Project Land Area is located to issue the corresponding Tax Clearance Certificate with regard to the transfer of the Project Land Area to ALI and LPHI based on their respective Allocations without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax and value-added tax. In reply, please be informed 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 service contract with the Government. P.D. No. 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 is of the opinion as it hereby holds that the joint venture entered into by and between ALI and LPHI is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. 2. The allocation of saleable area of the project between ALI and LPHI in consideration of their respective contributions, as stipulated in the Deed of Partition 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. ALI did not convey or transfer its ownership or interest over its parcels of land when it contributed the aforesaid landholdings to the joint venture. The said contribution constituted its capital contribution to the joint venture project, therefore, such contribution is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax. The transfer is also not subject to VAT, since the transfer is not in the course of business but a capital contribution. The Deed of Partition whereby ALI and LPHI will allocate unto each other their share in the saleable area 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 saleable area between the parties, as the return of the capital which each contributed. However, the acknowledgment to said Deed of Partition is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. However, upon the 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 regular income tax rate under Section 27(A) of the Tax Code of 1997, and to the creditable withholding tax under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001. Moreover, said 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. 3. This will authorize the Revenue District Officer (RDO) of the revenue district where the properties are located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the transfer of the Project Land Area to ALI and LPHI based on their respective Allocations without need of presentation of proof 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 will be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service