BIR Ruling [DA-205-06]

April 3, 2006 BIR RULING [DA-205-06] 22 (B); DA-192-2001/DA-264-99 Robinsons Homes, Inc. Level 2, Robinsons Galleria EDSA cor. Ortigas Avenue Quezon City Attention: Ms. Marilu M. Alferez Senior Vice-President and General Manager Gentlemen : This refers to your letter dated July 26, 2004 requesting for a ruling on the tax implications of the Joint Venture Agreement entered into by and between Robinsons Homes, Inc. and Don Pepe Henson Enterprises, Inc. for the development of real properties situated at Barangay Pampang, Angeles City. The facts as you represented are quoted as follows: " Background On January 8, 2004, Robinsons Homes, Inc. (RHI) and Don Pepe Henson Enterprises, Inc. (DPHEI) entered into a Joint Venture Agreement (JVA) for the development of three (3) parcels of land located at Barangay Pampang, Angeles City, Pampanga, known as "Forestpark Homes." DPHEI as owner contributed its property with an aggregate area of 142,309 sq. m. while RHI agreed to develop the same into a residential subdivision, to construct housing units on certain portions of the property, and to undertake the marketing and, in general, the management and operation of the subdivision project. Expenses for the development works, re-survey, consolidation and subdivision of titles and construction of housing units are for the account of RHI. Titles consolidated and re-subdivided are still in the name of DPHEI. RHI shall be responsible for the execution of contracts, collection of proceeds of sales, and the collection of the required taxes. Real estate taxes on the property shall be shared by both parties in accordance with the sharing agreement of the JVA. RHI is granted the exclusive option to construct housing units on the saleable lots of the property, including the lots pertaining to DPHEI as its share. Ownership and proceeds from the sale of housing units shall accrue solely to RHI regardless of whether the lots on which the houses are built pertain to DPHEI or to RHI. HAaDcS Marketing of the saleable lots shall be exclusively undertaken by RHI, which includes the determination of marketing policies, pricing, terms, documentation, collection proceeds, etc. Sharing Arrangement RHI shall be entitled to 55% of the saleable lots while DPHEI 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." On the basis of the foregoing, you now request for a confirmation of your opinion on the following issues: 1. The JVA entered into by and between DPHEI and RHI does not create a separate taxable entity. 2. The allocation and distribution of the saleable lots to DPHEI and RHI is not subject to income tax, expanded withholding tax, value-added tax and documentary stamp tax. 3. The sale by DPHEI or RHI 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 tax (unless exempt under Section 109 (w) of the Tax Code of 1997). 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 DPHEI or RHI by virtue of the marketing provision of the JVA. Accordingly, RHI may execute the Deeds of Absolute Sale in its name notwithstanding the fact that the titles to the property are still in the name of DPHEI. CSEHcT 5. The Revenue District Office having jurisdiction over the property is authorized to issue the Tax Clearance/Certificate Authorizing Registration with regard to the sale of all the lots of the property. In reply, please be informed that: 1. Pursuant to Section 22 (B) of the Tax Code of 1997, the term "corporation" includes 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. 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 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 or consortium formed for the purpose of undertaking construction projects from the definition of taxable corporation, this Office hereby opines that the joint venture by and between DPHEI and RHI is not subject to income tax under Section 27 of the Tax Code of 1997. 2. The allocation and distribution of the saleable lots to DPHEI and RHI is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax, because the aforestated assignment is a mere return of capital contribution, and therefore not a taxable event. (BIR Ruling No. DA-192-2001 dated October 17, 2001) IaESCH The Sharing Agreement whereby DPHEI and RHI will allocate unto each other their shares 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, because the allocation is made without monetary consideration and is not in connection with a sale. The allocation is made merely to segregate the saleable area between the parties, as the return of the capital which each has contributed. However, the acknowledgment to said Sharing Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. DA-240-2001 dated November 16, 2001) The transfer is also not subject to VAT since under Section 105 of the Tax Code of 1997, 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 the parcels of land, DPHEI, neither sells, barters, exchanges goods, properties nor renders service to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001; BIR Ruling No. DA-115-2001 dated September 5, 2001) 3. It is understood however, that 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 creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001 or capital gains tax under Section 27 (D) (5), as the case may be. 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. 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 DPHEI or RHI by virtue of the marketing provision of the JVA. Accordingly, RHI may execute the Deeds of Absolute Sale under an irrevocable Special Power of Attorney in its name in order to transfer title to the property in the name of the buyers notwithstanding the fact that the titles to the property are still in the name of DPHEI. The creditable withholding tax, value-added tax and documentary stamp tax paid thereon may be credited in the name of DPHEI. (BIR Ruling No. DA-264-99 dated May 5, 1999) 5. This will authorize the Revenue District Officer (RDO) of the revenue district where the properties are located to issue the corresponding Tax Clearance Certificate/Certificate Authorizing Registration with regard to the transfer of the project land area to the co-venturers 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 ascertained that the facts are different, then this ruling shall be considered null and void. THAICD Very truly yours, Commissioner of Internal Revenue By: (SGD.) PABLO M. BASTES, JR. OIC, Head Revenue Executive Assistant Legal Service