BIR Ruling [DA-211-00]

April 4, 2000 BIR RULING [DA-211-00] Robinsons Land Corporation 2nd Level, 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 March 17, 1999 requesting for a ruling on the tax implications of the Joint Venture Agreement entered into by and between Robinsons Land Corporation (RLC), as Developer and Manila Midtown Hotel and Land Corporation (MMHLC), as Owner for the development of several parcels of land located at Barrio San Jose, Antipolo, Rizal into a housing subdivision and/or other land uses. It is represented that MMHLC is the absolute and registered owner of twelve (12) parcels of land located at Barrio San Jose, Antipolo, Rizal with an aggregate area of 410,811 square meters and covered by TCT Nos. 272629, 272630, 272631, 272632, 272633, 272634 and 272635 issued by the Register of Deeds of Marikina; that on January 30, 1995, RLC and MMHLC entered into a Joint Venture Agreement (JVA) for the development of a portion of the above-mentioned properties or an area of 378,642 square meters into a housing subdivision as well as the marketing, management and operation of the same; the RLC has agreed to undertake and to finance the full development, marketing, management and operation of the project; and that the essential features of the Agreement are as follows: 1) That the Owner and Developer shall share in the Joint Venture by dividing the saleable lots between themselves so that the Owner shall be entitled to forty five percent (45%) of the saleable lots and the Developer shall be entitled to fifty five percent (55%) thereof. The Owner and Developer shall, at a later date, agree on the specific lots/units that will pertain to each in accordance with this paragraph; ASICDH 2) After the determination of the specific lots comprising, their respective shares in the project as provided in the immediately preceding paragraph, any other expenses for operation and maintenance that may be incurred shall be borne proportionally by Developer and Owner on the same sharing basis; 3) The Developer and Owner shall thereupon establish a mutually acceptable system that will provide for a periodic accounting and liquidation of the proceeds arising from this joint ventures; and 4) It is understood and agreed that the Developer shall construct housing units on lots in the resulting residential subdivision including the share of lots of the Owner and Developer shall be entitled to all proceeds of sale of the housing units. 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 MMHLC does not create a separate taxable entity; "2. The allocation and distribution of the saleable lots to RLC and MMHLC is not subject to income tax, expanded withholding tax, value-added tax and documentary tax; "3. The sale by RLC or MMHLC 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 RLC or MMHLC 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 MMHLC; and "5. RLC or MMHLC 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 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. 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. HDIATS 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 MMHLC 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 MMHLC 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 MMHLC 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 Section 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 titles to the property are still in the name of MMHLC, as owner, RLC, as developer merely acts as the agent of the former in executing the marketing provision of the JVA. Accordingly, RLC may execute the Deed of Absolute Sale involving the aforementioned property as attorney-in-fact of MMHLC so that title to the said property may be transferred to the buyer. However, the creditable withholding tax, value-added tax and the corresponding documentary stamp tax shall be for the account of MMHLC. 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 (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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)