Landworks Asia, Inc.

May 2, 2007 BIR RULING [DA-280-07] 22 (B) DA-047-2004 Landworks Asia, Inc. 3rd Floor, PGMC Building No. 76 Calbayog corner Libertad Street Mandaluyong City Attention: Mr. Wilfredo S. Teodoro Project Officer Gentlemen : This refers to your letter dated March 5, 2007 requesting for a ruling relative to the Joint Venture Contract entered into by and between Malolos Properties, Inc. (landowner) and Excelsisland, Inc. (developer). Documents submitted show that the Landowner owns a parcel of land situated in Barangay Balayong, Malolos City, with a total area of 31,298 square meters, more or less, with TCT No. T-189605; that Landowner entered into a Development Memorandum of Agreement with the Developer to develop the subject properties into a planned residential subdivision in accordance with PD 957 and as an expansion phase in the DEVELOPER'S on-going development of Villa Desta subdivision; that the parties agreed that the Landowner shall be entitled to forty five percent (45%) and the Developer shall be entitled to fifty five percent (55%) of the total net saleable at the residential lots in the project; that the Developer subsequently assigned, transferred and conveyed to Landworks Asia, Inc. (Landworks) all its rights and interests in the Development MOA, subject to the assumption by the latter of all liabilities thereon; and that you now request for an opinion relative to the following: cCSDTI 1. Exemption of the Joint Venture from income tax under Section 27, in relation to Section 22 (B) of the National Internal Revenue Code of 1997 (NIRC) and the relevant provisions of Presidential Decree No. 929. 2. Exemption of the assignment by Landowner of its realty to Landworks from corporate income tax/creditable withholding tax and capital gains tax, it being merely a transaction to effect its capital contribution to the joint venture and not a taxable event; 3. Exemption of the Partition Agreement between Landowner and Landworks, whereby the parties agreed to allocate to each other their aliquot shares of 45% and 55% respectively, in consideration of their capital contribution, from documentary stamps tax withholding taxes, capital gain tax, income tax, the allocation merely to segregate the saleable areas between the two parties, as a return of their capital contribution in the joint venture. 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 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 the Owners and the developer is not subject to income tax under Section 27 of the tax Code of 1997. IDSaAH 2. The assignment by the Landowner of its realty to Landworks is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax, because the aforestated assignment is merely a transaction to effect its capital contribution to the joint venture and not a taxable event. (BIR Ruling No. DA-192-2001 dated October 17, 2001) 3. The Partition Agreement whereby the Landowner and Landworks/Developer will allocate unto each other their share in the unit saleable area of the project, 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 acknowledgement to said Partition 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) 4. 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 its parcels of land, the Owner, 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) 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 24 (D) (1), 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. AcDaEH 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service