BIR Ruling [DA-309-03]

September 23, 2003 BIR RULING [DA-309-03] 22 (B) DA286-98 Robinsons Homes, Inc. Level 2, Robinsons Galleria Edsa Entrance Edsa corner Ortigas Avenue Quezon City Attention: Ms. Marilu M. Alferez Senior Vice President and General Manager Gentlemen : This refers to your letter dated September 12, 2003 stating that on July 30, 2002, Robinsons Homes, Inc. (RHI) and Pueblo de Oro Development Corporation (PODC) entered into a Joint Venture Agreement (JVA) for the development of a parcel of land located at Cagayan de Oro City; that PODC, as owner, contributed its property with an aggregate area of 200,000 square meters while RHI agreed to develop the same into a residential subdivision and to construct housing units on RHIs share of the property; that the marketing shall be done by both PODC and RHI in relation to their specific lot shares and, in general, the management and operation of the subdivision project; that the expenses for the development works, re-survey, consolidation and subdivision of titles and construction of housing units are for the account of RHI; that the titles consolidated and re-subdivided are still in the name of PODC; that the real estate taxes on the properties shall be shared by both parties in accordance with the JVA; that RHI is granted the exclusive option to construct housing units on the saleable lots of the property pertaining to its share; that the ownership has been delineated and identified by lots; that each party undertakes to market their respective shares and the proceeds of sales shall be accrued to each party to which it belongs; that RHI shall be entitled to 50% of the saleable lots while PODC shall likewise be entitled to 50% thereof; and that before any selling is done, the parties shall agree on the specific lots to be assigned to each of them. Based on the foregoing representations, you now request confirmation of your opinion that 1. The JVA entered into by and between PODC and RHI does not create a separate taxable entity; 2. The allocation and distribution of the saleable lots to PODC and RHI is not subject to income tax, expanded withholding tax, value-added tax and documentary stamp tax. 3. The sale by PODC or RHI 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 tax (unless exempt under Section 109(w) of the Tax Reform Act); cECTaD 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 PODC or RHI by virtue of the marketing provision of the JVA. Accordingly, RHI 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 PODC; and 5. PODC or RHI can secure the Tax Clearance/Certificate Authorizing Registration from the Revenue District Office having jurisdiction over the property with regard to the sale of lots pertaining to their respective shares. In reply thereto, 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 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. 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 JVA entered into by PODC and RHI 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 PODC and RHI in consideration of their respective contributions, as stipulated 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 has contributed. Moreover, in the event that RHI 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 RHI or PODC 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, as amended, and to the value-added tax and documentary stamp tax 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. DA065-97 dated February 10, 1997; DA286-98 dated June 29, 1998) 4. The JVA provides that the marketing shall be done by both PODC and RHI in relation to their specific lot shares of the project. The term "marketing" includes but is not limited to the determination of marketing policies, pricing, terms and conditions of sale, restrictions to be annotated on the titles of lots, documentation and collection of proceeds of sales. Accordingly, by virtue of the marketing agreement, RHI may execute the Deed of Absolute Sale in its name in order to transfer title to the property in the name of the buyers with regard to its share in the saleable lots as well as the share of PODC provided that it should be stated in the Deed of Absolute Sale that RHI is acting as Attorney-in-Fact for the PODC share notwithstanding the fact that in the latter case, titles to the properties may still be in the name of PODC. Such being the case, the creditable withholding tax, documentary stamp tax and value-added tax paid thereon may be credited in the name of RHI. 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, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service