PCK Trade and Realty Corporation

May 26, 2008 BIR RULING [DA-316-08] Section 22 (B); BIR Ruling No. DA-277-2003 PCK Trade and Realty Corporation 203 Alpha Bldg., 77 Boni Serrano Avenue Bagong Lipunan, Cubao Quezon City Attention: Ms. Eulalia J. Aleman General Manager Gentlemen : This refers to your letter dated March 24, 2008 requesting confirmation that the Joint Venture Agreement ("JVA") by and between the Landowner, AB Capital Investment Corporation ("ACIC" for brevity) and the Developer, PCK Trade and Realty Corporation ("PTRC" for brevity) will have the following tax consequences: 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 National Internal Revenue Code (NIRC), as amended; and 2. Since the JVA will not create a separate taxable joint venture, the subsequent division and allocation of ownership of the developed property between the parties will not be subject to income tax. Documents show the ACIC with address at Level 8 Phinma Plaza, 39 Plaza Drive, Rockwell Center, Makati City is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) under SEC Registration No. 91831. The primary purpose for which it was formed is "to engage in and conduct business as a full-service investment house with quasi-banking and other functions . . .". It is the absolute and registered owner of two (2) parcels of land situated at Barangay Puting Kahoy, Silang, Cavite ("Property") covered by Transfer Certificates of Title Nos. T-71390 and T-71391 issued by the Register of Deeds of Tagaytay City with an area of 26,320 square meters and 20,680 square meters, respectively or a total land area of 47,000 square meters. On the other hand, PTRC with address at 203 Alpha Building, 77 Boni Serrano Avenue, Bagong Lipunan, Cubao, Quezon City is a domestic corporation duly registered with the SEC under SEC Registration No. ASO93-03511 dated April 5, 2004. Its primary purpose is "to acquire by purchase, lease, donation or otherwise, and to own, use, improve, develop, subdivide, sell, mortgage, exchange, lease, develop and hold for investment or otherwise, real estate of all kinds, whether improve, manage or otherwise dispose of buildings, houses, apartments, and other structures of whatever kind, together with their appurtenances". It is duly licensed to undertake real estate development and management. Sometime in the year 2007, ACIC (Landowner) in partnership with Osato Agro Industrial and Development Corporation (Partner) and the Developer, Southern Rich Silang Development, Inc. (SRSDI) entered into an undated JVA for the development of Richland Homes Project (the "Project") into a commercial/residential subdivision. Under the proposed JVA, ACIC and SRSDI will finance, develop, implement, and complete the Project through an unincorporated joint venture. The JVA provides for the following terms and conditions: 1. The Landowner, ACIC will contribute to the Project the above-described Property; 2. The Developer, SRSDI has agreed to finance and develop the Property into a residential/commercial subdivision and/or other land uses in accordance with the Master Development Plan, market and manage the Project; 3. The Landowner, ACIC and the Developer, SRSDI shall allocate and share in the saleable lots proceeds of the Project pursuant to the following ratio: Landowner and the Partner entitled to forty percent (40%) of the saleable lots; Developer entitled to sixty percent (60%) of the saleable lots; and 4. The subdivided saleable lots shall be assigned to the Landowner and the Developer and transferred in their names upon approval of the subdivision plan. On July 25, 2007, SRSDI and PTRC entered into a Deed of Assignment whereby SRSDI transferred its rights, interests and participation in the JVA unto PTRC. In reply, please be informed as follows: 1. Pursuant to Section 22 (B) of the NIRC, as amended, 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. 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 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 confirms your opinion that the JVA to be entered into by and between ACIC and PTRC will not create a separate taxable joint venture within the meaning of Section 22 (B) of the NIRC, as amended. Accordingly, the joint venture to be entered into by and between ACIC and PTRC is not subject to the regular corporate income tax under Section 27 (A) of the NIRC, as amended. Moreover, the contribution of each of the parties to the joint venture is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax since the parties did not convey or transfer any ownership or interest when they contributed to the joint venture but merely pooled their resources to a common fund. The said contribution constituted their capital contribution to the joint venture project. The transfers are also not subject to value-added tax (VAT), since the transfers are not in the course of business but capital contributions. 2. The allocation of salable lots of the Project between ACIC and PTRC in consideration of their respective contributions 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 party has contributed. The Partition Agreement whereby ACIC and PTRC will allocate unto each other their share in the saleable area in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 of the NIRC, as amended, 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 contributed. However, the acknowledgment to said Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the NIRC, as amended. However, 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 regular income tax rate under Section 27 (A) of the NIRC, as amended and to the creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR 6-2001. Moreover, said sale shall be subject to the documentary stamp tax imposed under Section 196 of the NIRC, as amended based on the gross selling price or fair market value of the properties whichever is higher. Likewise, the said sale shall 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