Coneland Realty & Development Corporation

April 21, 2008 BIR RULING [DA-258-08] Sec. 22; R.A. 7279; RMC 42-01; RR 16-05; DA-058-07; DA-325-07; S20-024-06 Coneland Realty & Development Corporation Rm. 204, A & P Building Lazatin Blvd., San Fernando, Pampanga Attention: Mr. Nelson F. Lisud Executive Vice-President Gentlemen : This refers to your letters dated March 13 and 19, 2008 requesting for a ruling on the tax consequences of the Joint Venture Agreement (JVA) executed by and between North Breeze Realty Corporation ("NBRC") and Coneland Realty & Development Corporation ("Coneland") for the construction of a subdivision project, to wit: 1. The JVA will not create a separate taxable joint venture within the meaning of Section 22 (B), in relation to Section 27 (A) of the Tax Code of 1997; and 2. Since the above subdivision project is in accordance with the socialized housing program of Pag-IBIG, the subsequent dispositions by Coneland of the developed subdivision lots and/or housing units to its buyers, who are members of Pag-IBIG, are not subject to income tax, creditable withholding tax and value-added tax. Consequently, the 50%-50% share each of NBRC and Coneland in the proceeds of the sale of the developed lots and/or housing units is likewise not subject to income tax, creditable withholding tax and value-added tax. Documents submitted disclosed that NBRC is the owner of a certain parcel of land with an approximate aggregate area of 46,089 square meters, covered by Transfer Certificate of Title No. 544291-R of the Registry of Deeds of the Province of Pampanga, situated in Barangay Alasas, San Fernando Pampanga. Coneland is a corporation engaged in the real estate business and is duly licensed to undertake real estate development and management. NBRC and Coneland entered into a JVA for the construction of a subdivision project on the land owned by NBRC. Under the JVA, Coneland will finance, develop, implement, and complete the subdivision project based on a Master Development Plan through an unincorporated joint venture. NBRC has agreed to contribute the use of its land. On the other hand, Coneland agreed to shoulder all construction costs of the subdivision project. NBRC and Coneland further agreed that from the completion of each phase of the project, Coneland will sell or dispose the developed subdivision lots and/or housing units, the titles of which are under the name of NBRC. As per the terms of the JVA, the parties shall divide and distribute among them 50%-50% share each of the saleable lots. Coneland, on the hand, entered into a Funding Commitment Agreement with the Home Development Mutual Fund (HDMF), commonly known as Pag-IBIG Fund, as its targeted buyers are Pag-IBIG members-beneficiaries. Coneland has been duly accredited by Pag-IBIG. Under the Pag-IBIG Housing Program, upon completion of the housing units and upon approval by HDMF of the housing loans, Deeds of Assignment with Special Power of Attorney shall be executed by Coneland in favor of the Pag-IBIG Fund with the conformity of the buyers-members. Said instruments shall be annotated at the back of the corresponding titles of the lots disposed. After annotation, Pag-IBIG Fund will then release the loan proceeds to Coneland. The title, which is still in the name of NBRC, will only be released and transferred to the buyers-members after two (2) years of payment of the amortization to the Pag-IBIG Fund. Considering the foregoing, Coneland and NBRC further agreed that they will share the proceeds of the developed lots or the completed housing units sold to the members-beneficiaries on a 50%-50% ratio in accordance with the terms of the JVA. In reply, please be informed that your opinion is hereby confirmed as follows: Pursuant to Section 22 (B) of the Tax Code of 1997, as amended, 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. 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 NBRC and Coneland will not create a separate taxable joint venture within the meaning of Section 22 (B) of the Tax Code of 1997, as amended, and the resulting joint venture between said parties is not subject to the corporate income tax under Section 27 (A) of the same Code. Moreover, the subsequent distribution of the saleable lots and/or completed housing units to the co-venturers pursuant to the allocation agreement embodied in the JVA 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 party to the joint venture has contributed. However, upon subsequent sale by the co-venturers of their respective shares in the saleable lots and/or completed housing units to third parties, any 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, as amended, and consequently, to the creditable withholding tax under Revenue Regulations No. 2-98, as amended, unless the sale of the same is covered by an exemption. In the instant case, considering that the subdivision project developed by the co-venturers is in accordance with the socialized housing program of Pag-IBIG, NBRC and Coneland, therefore, are not subject to the regular corporate income tax on their taxable income during each taxable year respectively derived by them from the sale of the subdivision project. Section 20 of Republic Act (R.A.) No. 7279, provides as follows: "Sec. 20. Incentives for the Private Sector Participating in Socialized Housing. To encourage greater participation in socialized housing and further reduce the cost of housing units for the benefit of the underprivileged and homeless, the following incentives shall be extended to the private sector: xxx xxx xxx "(d) Exemption from the payment of the following: (1) Project-related income taxes; (2) Capital gains tax on raw lands used for the project; (3) Value-added tax for the project contractor concerned;" Based on the foregoing provisions, NBRC, the landowner-co-venturer, and Coneland, the developer-co-venturer, of the real property used in the socialized housing project of Pag-IBIG, is exempt from the payment of project related income taxes, and consequently, from withholding tax on the conveyance of the developed lots and/or housing units to the intended beneficiaries. However, any sale made by the co-venturers to interested parties other than the principal target beneficiaries under Section 3 (t) and 16 of R.A. No. 7279, shall not be entitled to the foregoing tax exemption. Moreover, NBRC and Coneland are exempt from the payment of value-added tax (VAT) on their sale of the developed lots and/or housing units to the intended beneficiaries. (Sec. 4.109.1 (B) (p) (3) of RR No. 16-2005, implementing R.A. No. 9337) However, purchases of goods/articles by Coneland, as the developer, are subject to VAT, even if the said purchases are to be used for the socialized housing project. (Revenue Memorandum Circular (RMC) No. 42-01 dated October 5, 2001). Further, it has to be emphasized, that this ruling is never intended and shall not be construed as giving authority to the concerned Register of Deeds to effect transfer of the land titles in the name of the buyers without the necessary certificate of authority to register issued by this Bureau. In this regard, this ruling shall be presented to the Revenue District Office (RDO) concerned in order for the latter to issue the Certificate Authorizing Registration (CAR) without the payment of the taxes on the transfer of the subject realties to the intended beneficiaries. It is, however, understood that the Certificate Authorizing Registration (CAR) shall only be issued after it is established upon proper verification by the Revenue District Officer (RDO) concerned that, considering the rules on valuation of real property, the actual selling price per sale transaction of the units in this case does not really exceed PhP300,000.00. (HUDCC, Memorandum Circular No. 3, Series of 2005) Thus, sale of a unit above the maximum amount shall be subject to the corresponding internal revenue taxes. However, it is observed that DST is not one of the taxes covered by the tax exemption clause in Section 20 of R.A. No. 7279. Such being the case, the project developer/seller shall be liable to pay the documentary stamp tax on the documents conveying the property imposed under Section 196 of the Tax Code of 1997, based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6 (E) of the said Code, whichever is higher. Finally, in connection with the above construction undertaking, the Joint Venture and the co-venturers are hereby required to register with the Revenue District Office (RDO) where their principal place of business is located. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service