BIR Ruling [DA-150-99]

March 12, 1999 BIR RULING [DA-150-99] Robinson's Land Corporation Level 2, Galleria Corporate Center Robinsons Galleria 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 Land Corporation (RLC) and Vine Development Corporation (Vine) for the development and construction of several parcels of land into residential and commercial subdivision complex. It is represented that Vine, a corporation duly organized and existing by virtue of Philippine laws, is the exclusive and irrevocable Attorney-in-Fact of Prime Investment and Management Corporation, Messrs. Vitaliano G. Ponce, Vivencio G. Police and Venancio G. Ponce, all of whom are the absolute and registered owners of six (6) parcels of land located at Dasmarinas, Cavite with an area of 140,099 square meters and the rightful and/or registered owner of another parcel of land with an area of 20,000 square meters or the aggregate area of 160,099 square meters, which parcels of land are hereinafter referred to as First "A" Property; that Vine is the absolute and registered owner of 414,376 square meters of land and the rightful and/or registered owner of about 103,008 square meters of land or the aggregate area of 517,384 square meters of land located at Dasmarias, Cavite, which property shall hereinafter referred to as First "B" Property; that Vine is in the process of finalizing the acquisition of six (6) parcels of land located in Dasmarias, Cavite with an area of 146,928 square meters, which property shall be hereinafter referred to as First "C" Property; that First "A", "B" and "C" properties shall comprise and hereinafter be collectively called the First Property; that Vine is willing to enter into a JVA for the development of the First Property into a residential subdivision; that pursuant to a Contract/Agreement the Ramonafe Contract/Agreement) dated October 23, 1991, Vine possesses rights and interest to the extent of about sixty percent (60%) over the property owned and registered in the name of Ramonafe Corporation, containing an area of 160,000 square meters less the donated area or a net area of about 130,000 square meters, which property shall hereinafter referred to as the Second Property; that Vine is also the rightful and/or registered owner of another property with an area of about 50,000 square meters, which property is hereinafter referred to as the Third Property; that RLC having the financial and technical capability for realty development work offered to Vine and is solely responsible for: (a) the development of the First Property into a residential subdivision with low-end, medium-end and high-end categories, (b) the development of the Second Property and/or Third Property into a commercial subdivision complex, (c) the construction of housing units on certain portions of the First property, (d) the marketing, and (e) in general, the management and operations of the subdivision and commercial subdivision complexes; that on December 29, 1994, RLC and Vine entered into a JVA for the development and marketing of the aforementioned parcels of land; that the essential features of the JVA are as follows: 1) Expenses for the development works, re-survey, consolidation and subdivision of titles, construction of housing units are for the account of RLC. RLC shall be responsible for the execution of sales contracts, collection of proceeds of sale, collection of required taxes. Real estate taxes on the properties are borne by both parties in accordance with their sharing arrangements. 2) For the First Property - RLC shall be entitled to 55% of the saleable lots while Vine shall be entitled to 45% thereof. Before any selling is done, the parties shall agree on the specific lots to be assigned to each of them. RLC is allowed to construct housing units on its 55% share of the saleable lots as well as on the 55% of the 45% share of Vine in the saleable lots. RLC owns exclusively the housing units it will construct including on the 55% of the 45% share of Vine and is entitled to the proceeds thereof. 3) For the Second Property - RLC shall be entitled to 45% share in the 60% interest of Vine in the JVA with Ramonafe Corporation. Vine shall be entitled to 55% thereof. 4) For the Third Property - RLC has option to purchase the Third Property. Based on the foregoing representations, you now request confirmation on the following issues: "1. The Joint Venture Agreement entered into by and between RLC and Vine does not create a separate taxable entity; "2. The allocation and distribution of the saleable lots to RLC and Vine is not subject to income tax, expanded withholding tax, value-added tax and documentary tax; "3. The sale by RLC or Vine 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 Vine or RLC by virtue of the marketing provision of the JVA. Accordingly, RLC 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 Vine; and "5. Vine or RLC 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. 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 RLC and Vine 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 RLC and Vine 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 RLC 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 RLC or Vine 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 RLC being the developer shall have exclusive marketing rights over its share in the property as well as those pertaining to the 55% of the 45% share of Vine. 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, RLC 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 Vine. Such being the case, the creditable withholding tax, documentary stamp tax and value-added tax paid thereon may be credited in the name of RLC. 5. This will authorize the Revenue District Office (RDO) where RLC or Vine 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. dctai 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, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue