BIR Ruling [DA-213-00]

April 6, 2000 BIR RULING [DA-213-00] Ayala Land, Inc. Tower One, Ayala Avenue 1226 Makati City Attention: Atty . Ma . Angeli O . Lerma Manager-Legal Department Gentlemen : This refers to your letter dated March 21, 2000 stating that OLC Development Corporation (OLC) is a corporation duly organized and existing under the laws of the Philippines; that it is the registered owner of parcels of land with an aggregate area of 2,282,632 square meters located in Calamba, Laguna; that on the other hand, Tomahawk Development Corporation, Campton Land Corporation, Balibago Land Corporation, Southern Plains, Inc., Equus Property Venture, Inc., Fidelity Investment Corporation, Central Estate Management, Inc., Southern Heights Land Development Corporation, Gentle Wind Land Development Corporation, Centennial Land and Development Corporation, Greenfield Development Corporation, and Greenfield Property and Development Holdings, Inc., (Greenfield Group) are all corporations duly organized and existing under the laws of the Philippines; that the Greenfield Group are likewise the owners of parcels of land located in Calamba, Laguna with an aggregate area of 2,491,876 square meters; that taken together, the OLC and Greenfield Group parcels of land would comprise approximately 4,774,510 square meters in area and which will be the site of the project in the agreements entered into by and among OLC, the Greenfield Group and Ayala Greenfield Development Corporation (AGDC) for the joint development of the parcels of land into an integrated community with residential, retail, commercial, recreational, and golf course and country club components; that the project shall consist in the planning, financing, construction and development of the parcels in phases and, depending on the phase of development to be undertaken, shall result in finished products in the form of developed lots, or interest in a building and/or land in the form of condominium units; that the essential features of the above-mentioned agreements are as follows: (a) OLC and the Greenfield Group shall respectively contribute and pool together their respective parcels that will constitute the total area of the entire consolidated project; (b) AGDC shall contribute the cash for the development and construction of the entire project and the acquisition of parcels of land critical to the development of the project and shall perform all the development work for the project; (c) In consideration of, and in return for, their respective contributions to the project, OLC and the Greenfield Group shall share in the distribution of Finished Products comprising the project proportionate to their respective contributions. In determining their respective shares in the Finished Products, each of the Parties was credited with an agreed value for their contribution (the Reference Value). In the case of the residential component of the project and in respect of each phase thereof, OLC and the Greenfield Group shall each be allocated and receive, in the form of whole developed residential lots, 10%, and AGDC shall be allocated and receive, in the form of whole developed residential lots, 80%, of the aggregate Reference Values of all the lots in the phase. The remaining portions of the phase not constituting developed residential lots consisting of roads, bridges, utilities and other common areas shall be allocated to AGDC; (d) The parties shall select the Finished Products to represent their respective allocations per phase. However, in the actual distribution of the residential lots, any of the parties may defer to a later phase the exercise of its right to receive any or all of such residential lots representing its allocation for a particular phase. In this event, the reference Value of the allocated residential lots (or the balance thereof) the receipt of which a party has chosen to defer shall be carried over to the immediately succeeding phase of any other development (upon the completion of the immediately succeeding phase). Thus, the Reference Value of the allocated residential lots that will be distributed to such party for such immediately succeeding phase shall be increased by the Reference Value of the residential lots the receipt of which has been deferred by the party in the immediately preceding phase (or phases). In no event, however, shall the share of each of the parties in the allocated Finished Products upon completion of the project exceed 10% of the aggregate Reference Values of all lots in the project (in case of OLC and the Greenfield Group) or 80% of the aggregate Reference Values of all the lots in the project (in case of AGDC); cdlex (e) The actual distribution to the parties of the Finished Products received pursuant to their respective allocations shall be effected through the execution of a Deed of Partition for each phase which the parties will execute without monetary consideration. Prior to the execution of the Deed of Partition, the parties shall have a prorated interest in the Project, or any insurance proceeds, assets and rights pertaining to the project determined on the basis of the pro rata allocation under paragraph (c) above; (f) After distribution of the Finished Products whether in the form of whole developed residential lots or condominium units, the parties shall maintain separate ownership of such allocated Finished Products and may sell or transfer the same to third parties. In connection therewith, you now request for confirmation of your opinion that "1. The joint venture whereby OLC and the Greenfield Group will contribute their respective parcels and AGDC 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 24(A) of the Tax Code; "2. The allocation and distribution of their respective shares in the project consisting of developed lots or condominium units 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, 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 have contributed to the project. The deferment by any party to a later phase of the project of its right to receive a specific allocation shall neither constitute a taxable event where such allocation constitutes part of the total return of capital that such party contributed to the entire project; "3. The Deed of Partition to be executed by the parties in respect of each phase of the project whereby they allocate and distribute among them their respective shares in the project in exchange for their respective contributions is without monetary consideration, hence, are not subject to value-added tax under Section 106 of the Tax Code, income/creditable withholding tax under Revenue Regulations No. 2-98, 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 properties are located to issue the corresponding Tax Clearance Certificate with regard to the transfer of the titles to the lots to be received by OLC, each of the corporations constituting the Greenfield Group, and AGDC based on their respective allocations pursuant to the Deed of Partition without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax, and value-added tax. In order to monitor whether the pro rata allocation of 80%-10%-10% among the parties as herein described is achieved at the completion of the entire project, the party (or parties, as the case may be) receiving its allocation in a particular phase shall submit to the said RDO a certification by an authorized officer of such party indicating the particular lots received as its allocation for such phase and the corresponding aggregate Reference Values of the lots so received." In reply thereto, please be informed that your opinion is hereby confirmed as follows: 1. Section 22(B) of the Tax Code of 1997 provides that 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. cdlex 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 Development Agreements entered into by and among OLC, the Greenfield Group and AGDC are 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 their respective shares in the project consisting of developed lots or condominium units in consideration for their respective contributions to the said agreements 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 defer its rights 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. 3. The Deeds of Partition to be executed by the parties in respect of each phase of the project whereby they will allocate and distribute among them their respective shares in the project, in exchange for their respective contributions, being without monetary consideration is not subject to value-added tax, income/creditable and documentary stamp taxes. (BIR Ruling Nos. 207-92 dated July 16, 1992; 349-93 dated July 30, 1993; DA Ruling No. 025-95 dated January 11, 1995) 4. This will authorize the Revenue District Officer (RDO) of the revenue district where the properties are located to issue the corresponding Tax Clearance Certificate (TCT) involving the transfer of the titles of the above-mentioned lots in the name of OLC, each of the corporations constituting the Greenfield Group and AGDC based on their respective allocations pursuant to the Deed of Partition, without need of the presentation of proof of payment of the creditable withholding tax, value-added tax and the corresponding documentary stamp tax. In order to monitor whether the pro-rata allocation of 80%-10%-10% among the parties is achieved at the completion of the entire project. Provided, that the party concerned, receiving its allocation in a particular phase shall submit to the said RDO a certification by an authorized officer of such party indicating the particular lots received as its allocation for such phase and the corresponding aggregate Reference Values of the lots so received. However, the subsequent sale by OLC and Greenfield Group of their respective shares in the saleable lots to third parties, the income 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 respectively 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. DA-065-97 dated February 10, 1997; DA-286-98 dated June 29, 1998) 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)