Macam Raro Ulep & Partners

April 18, 2008 BIR RULING [DA-253-08] Section 22 (B); DA-450-2004 Macam Raro Ulep & Partners Unit 1008, 10/F Atlanta Center Annapolis St., Greenhills San Juan, Metro Manila Attention: Augusto M. Macam Partner Gentlemen : This refers to your letter dated March 17, 2008, in behalf of your clients, J. KING & SONS COMPANY, INC. and FUENTE TRIANGLE REALTY DEVELOPMENT CORPORATION, seeking confirmation of your opinion that: 1) the Joint-Venture Agreement entered into by your clients for the development of a parcel of land into a world-class commercial and residential building to be known as ULTIMA RESIDENCES, will not create a taxable joint-venture as contemplated within the meaning of Section 22 (B) in relation to Section 27 (A), both of the Tax Code of 1997; and 2) that the allocation of their respective interest in the project as contemplated in the Joint-Venture Agreement is not a taxable event and is not subject to income, expanded withholding, value-added and documentary stamp taxes under the same Code. Documents submitted disclosed that J. KING & SONS COMPANY, INC. (J. KING & SONS, for short), is the registered owner of a parcel of land consisting of 991 sq. m. situated at Ramos St., Cebu City, covered by TCT No. 143654 of the Registry of Deeds for Cebu City; that FUENTE TRIANGLE REALTY DEVELOPMENT CORPORATION (FUENTE TRIANGLE, for short), is a domestic corporation registered with the Securities and Exchange Commission (SEC), with business address at Unit 1001, 10/F Atlanta Center, Annapolis St., Greenhills, San Juan, Metro Manila; that it is a corporate entity engaged in the business of developing properties, among others; that J. KING & SONS and FUENTE TRIANGLE entered into a Joint-Venture Agreement on October 30, 2006 for the development of the former's above-stated land into a world-class commercial and residential building to be known as the ULTIMA RESIDENCES. The essential terms and conditions of the agreement are as follows: 1. The Property Owner shall contribute their right, title and interest over the parcels of land constituting the contemplated project; 2. The Developer shall provide the necessary financing to construct and develop the contemplated project and shall be responsible for financing, overseeing, coordinating and causing the performance and execution of the necessary works for the implementation of the project; 3. In consideration of and in return for their investment, the equivalent capital contribution/interest of the parties to the agreement shall be divided and distributed in accord with the following proportion: a. To the Property Owner, shall be assigned 72 parking slots constituting as the irrevocable and absolute value which shall be evidenced by the execution of a document of acceptance of the parking lots assigned to it; b. To the Property developer, it shall own the land and the building does constructed likewise to be evidenced by the appropriate document of conveyance; 4. The actual distribution to the parties of the respective interest shall be effected through a deed of conveyance for which the parties will execute without monetary considerations; and 5. In accord with the above formulation, the parties shall maintain separate ownership of their respective rights and interests in accord with their agreement hereto specified. That similar to any other Joint Venture Agreements, upon the completion of the aforesaid projects, ownership of the lots will be apportioned between the individual landowners and the herein developer, FUENTE TRIANGLE, as their respective shares in such joint venture undertaking. In reply, please be informed as follows: Pursuant to Section 22 (B) of the Tax Code of 1997, the term corporate includes partnership, no matter how created or organized, joint stock companies, 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 as not to include a 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 undertaking big construction project; (4) To assist them in achieving competitiveness with foreign contractors, the joint ventures formed by them should not be subjected to additional income taxes. 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 J. KING & SONS and FUENTE TRIANGLE is not subject to the regular corporate income tax under Section 27 (A) of the Tax Code of 1997. The allocation of saleable units of the project between J. KING & SONS and FUENTE TRIANGLE, in consideration of their respective contributions, as stipulated in this Agreement 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. (BIR Ruling No. DA-192-2001 dated October 17, 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 them parcel of land, the landowners, neither sells, barters, exchanges goods, property nor renders services 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) The Sharing Agreement whereby J. KING & SONS and FUENTE TRIANGLE will allocate unto each other their share in the net 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 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. It is understood however, that upon 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. 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. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service