Francisco G. Tagao Law Office

May 27, 2008 BIR RULING [DA-319-08] Sec 22 (B); DA 378-05; DA 240-01 Francisco G. Tagao Law Office Tax and Corporate Service Unit 1101 11th Floor, Herrera Tower, V.A. Rufino cor. Valero Sts., Salcedo Village, Makati City Attention: Atty. Francisco G. Tagao Gentlemen : This refers to your letter dated May 20, 2008 requesting on behalf of your clients, Ayala Land Inc. ("ALI") and One Dela Rosa Property Development, Inc. ("ONE DELA ROSA"), for a ruling on the tax consequences of the Amended Joint Development Agreement executed by them for the construction and development of a Condominium Project ("the Project"). It is represented that on December 19, 2006, ALI and ONE DELA ROSA entered into a Joint Development Agreement ("JDA") which was subsequently amended on April 22, 2008 ("Amended JDA") for the construction and development of a condominium project on a parcel of land with an aggregate area of 3,612 square meters which is a portion of the parcels of land covered by Transfer Certificates of Title Nos. 2006906 and 2006907 issued by the Register of Deeds of Makati City in the name of ALI. Under the Amended JDA of the parties, ALI shall contribute the land to the Project. In turn, ONE DELA ROSA shall undertake the construction and development of the Project. The Project shall be predominantly an office building with accessory retail uses. It is intended to have a gross floor area of 57,288 square meters and gross leasable area of 46,868 square meters of office and retail space in the building. In return for the respective contributions of the parties to the Project, the parties shall receive their respective allocations as follows: a. ALI shall receive an Allocation with an aggregate Reference Value in the form of the highest number of whole condominium units equal to or not exceeding 10% of the aggregate Reference Value of all the Condominium Units in the Project. b. On the other hand, ONE DELA ROSA shall receive an allocation with an aggregate Reference Value equal to the difference between the aggregate Reference Value of all the Condominium Units and aggregate Reference Value of ALI's allocation. The term "Reference Value" is defined as the peso value to be assigned to the Condominium Unit to be determined by the Development Manager to be the most suitable for such Condominium Unit, equal to the gross selling price that a buyer will be required to pay if the Condominium Unit were to be sold to such buyer on a deferred payment basis. For the purpose of distributing the respective allocations of the parties in the Project, the Parties shall choose from among the Condominium Units with an aggregate Reference Value which shall be equal to but not exceed their respective allocations. Thus, ALI shall have the right to choose Condominium Units in the form of non-appurtenant parking units from all the Condominium Units of the Project. Thereafter, ONE DELA ROSA shall have the right to the balance of the Condominium Units. In the event that ALI shall have been allocated such number of Condominium Units with an aggregate Reference Value which is less than its allocation for the Project, thereby resulting in a deficiency in allocation, the parties shall agree on the actions to be taken to ensure that ALI shall have received its allocation in full. The actual distribution to the Parties of the condominium units as their respective allocations shall be effected through the execution of a Deed of Partition which shall be executed by the parties without monetary consideration after completion of the Project. Prior to the completion of the Project and execution of the Deed of Partition, the parties shall each have a prorated interest on the Project, or any insurance proceeds, assets and rights thereto, computed as a percentage which the Reference Value of their respective allocations bears to the aggregate Reference Value of all allocations for the Project. The Condominium Units in the Project shall be covered by the appropriate Condominium Certificates of Title in the name of the party to which the Condominium Units are allocated or its successor-in-interest. The land and common areas of the Condominium Project shall be transferred to a condominium corporation for the purpose of holding title to the land and the common areas and for such other purposes as may be necessary for the administration and management of the Condominium Complex pursuant to the Condominium Law. Based on the foregoing representations, you now request confirmation of your opinion that: 1. The joint venture formed by ALI and ONE DELA ROSA under the Amended JDA for the construction and development of the Project is not a taxable corporation, hence, is not subject to corporate income tax pursuant to Section 22 (B) in relation to Section 27 (A) of the Tax Code; 2. The contribution of the land by ALI as its capital and that of ONE DELA ROSA under the Amended JDA for the construction and development of the Project is not a taxable event that will give rise to income tax/capital gains tax and value added tax; 3. The allocation and distribution to ALI and ONE DELA ROSA of their respective shares in the condominium units in accordance with the amended JDA is not a taxable event; hence, not subject to income tax, creditable withholding tax and value added tax. Moreover, the Deed of Partition to be executed after completion of the Project and issuance of Condominium Certificates of Title to evidence such allocation and distribution is likewise not subject to value added tax, income tax, withholding tax and documentary stamp tax; and 4. The Deed of Conveyance of the land and the common areas of the Condominium Project to the condominium corporation without monetary consideration for the purpose of holding title to the land and the common areas and for such other purposes as may be necessary for the administration and management of the Condominium Complex in order to comply with the Condominium Law is not subject to income tax, withholding tax, value added tax or documentary stamp tax. In reply, please be informed that your opinion is hereby confirmed as follows: 1. Section 22 (B) of the Tax Code of 1997 provides that 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 joint venture formed under the Amended JDA entered into by and between ALI and ONE DELA ROSA is not treated as a corporation under Section 22 (B) of the Tax Code subject to the corporate income tax under Section 27 (A) of the same Code. 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. ALI did not convey or transfer its ownership or interest over its parcels of land when it contributed the same to the joint venture but merely pooled its resources to a common fund, along with that of ONE DELA ROSA for the purpose of undertaking the construction and development of the Project. These pooled resources are co-owned by the joint venture partners. The contribution of land by ALI, as well as that of ONE DELA ROSA of undertaking the construction and development of the Project, constituted its capital contributions to the joint venture project, therefore, such contribution is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax. The transfer is also not subject to VAT since the transfer is not in the course of business but a capital contribution. 3. The allocation and distribution of their respective shares in the Project in accordance with the Amended JDA in consideration for their respective contributions under the said agreement 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, the Deed of Partition to be executed to evidence the allocation and distribution and the issuance of the Condominium Certificates of Title, being without monetary consideration, is not subject to value-added tax, income/creditable and documentary stamp taxes. However, the notarial acknowledgment to the Deed of Partition is subject to documentary stamp tax of Php15.00 pursuant to Section 188 of the Tax Code. 4. The conveyance of the land and common areas of the Project to the condominium corporation for the purpose of holding title to such land and common areas and for such other purposes as may be necessary for the administration and management of the same pursuant to the Condominium Law is without monetary consideration and not in connection with a sale. Hence, no income will be generated. Thus, it is not subject to creditable withholding tax, value added tax and documentary stamp tax, except that the notarial acknowledgment to the Deed of Conveyance is subject to the documentary stamp tax of P15 pursuant to Section 188 of the Tax Code. This will authorize the Revenue District Officer (RDO) of the revenue district where the properties are located to issue the corresponding Certificates Authorizing Registration (CAR) and Tax Clearance Certificates (TCL) involving the transfer of the titles of the above-mentioned lots and the common areas of the Project to the condominium corporation, and the issuance of the Condominium Certificates of Title in the name of ALI and ONE DELA ROSA based on their respective allocations pursuant to the Deed of Partition, without need of the presentation of proof of payment of the creditable withholding tax, value-added tax and the corresponding documentary stamp tax. Provided, that the parties to the joint venture shall cause the Register of Deeds to annotate on the Transfer Certificate of Title that a development project is being undertaken on the land and is the object of the JDA between the parties, and that the joint venture is held to be a tax-exempt entity pursuant to this ruling issued by this Office. Provided further, that parties to the joint venture shall inform the Bureau of Internal Revenue, through the Law Division, of the fulfillment of the requirement on the distribution of the saleable/developed units in accordance with the allocation ratio in the JDA. For this purpose, a compliance report shall be filed by the parties with the Law Division upon completion of the project indicating the number of units built, the respective CTCs and the party in whose name the corresponding title was issued. 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