Dizon Lands Realty and Dev't. Corp.

June 3, 2008 BIR RULING [DA-338-08] Sec. 22; Joint Venture Dizon Lands Realty and Dev't. Corp. Angeles-Magalang Road, Pandan Angeles City Attention: Ms. Lynette Lansangan Office Administrator Gentlemen : This refers to your letter dated April 11, 2008 requesting a ruling that the distribution or allocation to the co-venturers of their respective shares in the development project known as "Ciudad De Hizon", is exempted from the payment of income, capital gains and documentary stamp taxes imposed under Sections 24 (A), 24 (D) (1), 27 (A), 27 (D) (5) and 196, all of the Tax Code of 1997, as amended. It is represented that Antonio H. David, married to Luz G. David, the Heirs of Adriano Garcia, namely, his surviving spouse, Corazon Garcia, and their children, Efren Garcia, married to Carmen Garcia, Edith Garcia-Mallari, married to Crispin Mallari, Emily Garcia, single, Elsa Garcia-Villanueva, married to Mario Villanueva, Erwin Garcia, married to Rizalina Garcia, and Nestor Lingat, married to Maricel Lingat, are the registered owners of the following real properties: Registered Owner TCT No. Lot No. Area (sq.m.) 1) Antonio H. David 406152-R 13-B-1 43,729 406151-R 13-A 20,000 406153-R 13-B-2 33,018 Total 96,747 Less: 1.5 hec. of Nestor Lingat 15,000 Excluded Area 5,000 Net Area 76,747 2) Hairs of Adriano 7692 (CLOA 11-A 11,000 Garcia # 00311943) 3) Nestor Lingat 7693 (CLOA 11-B 8,500 # 00311942) The above landowners are willing to have their properties annexed with Ciudad De Hizon, partitioned and developed by DIZON LANDS REALTY AND DEV'T. CORP., the developer, and converted into a residential subdivision on a joint venture basis. IaEACT The corresponding saleable lots per Joint Venture Agreement shall be distributed on a color-coding scheme as follows: Joint Venture by and between DIZON LANDS REALTY AND DEV'T. CORP. and Antonio H. David dated February 26, 2008: DIZON LANDS REALTY AND DEV'T. CORP. - 52.5% ratio per color on all saleable lots Antonio H. David - 47.5% ratio per color on all saleable lots Joint Venture by and between DIZON LANDS REALTY AND DEV'T. CORP. and Nestor Lingat dated August 13, 2007: DIZON LANDS REALTY AND DEV'T. CORP. - 55% ratio per color on all saleable lots Nestor Lingat - 45% ratio per color on all saleable lots Joint Venture by and between DIZON LANDS REALTY AND DEV'T. CORP. and the Heirs of Adriano Garcia dated August 13, 2007: DIZON LANDS REALTY AND DEV'T. CORP. - 55% ratio per color on all saleable lots Heirs of Adriano Garcia - 45% ratio per color on all saleable lots DIZON LANDS REALTY AND DEV'T. CORP. shall execute the corresponding Partition Agreement with the respective landowners, for purposes of implementing the distribution of the saleable lots to the co-venturers without any monetary consideration. In support of your request, you submitted copies of the Transfer Certificates of Title (TCTs), Tax Declarations (TDs) and the Joint Venture Agreements executed with the respective landowners. In reply, please be informed as follows: Section 22 (B) of the Tax Code of 1997, as amended, states as follows: "Section 22. Definitions. When used in this Title: xxx xxx xxx (B) The term 'corporation' shall include 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. 'General professional partnerships' are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business." (Emphasis supplied) DTIaCS The abovementioned exemption was initiated under Presidential Decree (P.D.) No. 929, dated May 4, 1976, which amended the definition of a "taxable" corporation in the Tax Code, as amended, to specifically exclude joint ventures formed for the purpose of undertaking construction projects. Said PD instituted the amendment of the definition of the term "taxable" corporation in recognition of the following situations: (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 local contractors to enter into joint ventures to pool their limited resources in undertaking big construction projects. Hence, to assist the local contractors in achieving competitiveness with foreign contractors, the joint ventures formed by said local contractors were thus deemed as not falling under the definition of a "taxable corporation", and thus not subject to income tax. This was, and still is, the intention of the legislature. Such being the case, the Joint Venture Agreements entered into by DIZON LANDS REALTY AND DEV'T. CORP. with the respective landowners, namely: Antonio H. David; the Heirs of Adriano Garcia, namely, his surviving spouse, Corazon Garcia, and their children, Efren Garcia, Edith Garcia-Mallari, Emily Garcia, Elsa Garcia-Villanueva and Erwin Garcia; and Nestor Lingat, are not subject to the income tax imposed under Section 27 (A) of the Tax Code of 1997, as amended. Moreover, the allocation of the saleable lots between DIZON LANDS REALTY AND DEV'T. CORP. and the respective landowners, which is done effectively in consideration of their respective contributions, does not constitute a taxable event, as no income is actually realized by either the developer and/or the landowners. The partition or allocation will be made without consideration, and will not be in connection with any sale between the said parties. As has been ruled by the BIR on numerous occasions, income, in a broad sense, means all wealth which flows into the taxpayer other than as a mere return of capital (Section 36, RR No. 2). The developer and the landowners, having contributed to the development of the aforementioned real properties, will not realize any income upon the allocation of the saleable lots. Hence, the allocation of lots arising from the Joint Venture Agreements executed by the above parties is not subject to income tax, and consequently, to withholding tax. The said allocation, likewise, is not subject to VAT. Under Section 105 of the 1997 Tax Code, as amended, 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. However, by contributing the parcels of land, the landowners 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). SAHEIc The developer and the landowners will only realize income upon their respective sales of the saleable lots allocated to each of them. In this regard, said sales to third parties, if ever undertaken by the developer and/or the landowners, would be subject to regular income tax at the rate of 35%, in accordance with Sections 24 (A) and 27 (A) of the 1997 Tax Code, as amended, and consequently to withholding tax as implemented under Revenue Regulations (RR) No. 2-98, as amended. The said sales by the developer and/or the landowners to third parties would likewise be subject to the VAT at the rate of 12%, in accordance with Sections 106 and 109 of the 1997 Tax Code, as amended, and to the Documentary Stamp Tax (DST) at the rate of fifteen pesos (P15.00) for each one thousand pesos (P1,000.00), or fractional part thereof in excess of one thousand pesos (P1,000.00) of such consideration or value, in accordance with Section 196 of the 1997 Tax Code, as amended. Further, the corresponding Partition Agreements that will be executed by the developer with the respective landowners, whereby the developer and the landowners allocate unto each other their corresponding shares in the saleable lots in consideration of their respective contributions, are not subject to the DST imposed under Section 196 of the 1997 Tax Code, as amended, considering that, as stated earlier, the allocation is made without monetary consideration and is not in connection with a sale. In this regard, Section 185 of the Revised Documentary Stamp Tax Regulations (Regulations No. 26)provides that "conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable." Accordingly, since the aforementioned Partition Agreements will be executed without consideration and not in connection with a sale between DIZON LANDS REALTY AND DEV'T. CORP. and the respective landowners, no DST therefore is due and collectible on said Partition Agreements. However, the notarial acknowledgment to said Partition Agreements shall be subject to the DST pursuant to Section 188 of the 1997 Tax Code, as amended, in the amount of P15.00. In connection with the above development project, the respective Joint Ventures created and their respective co-venturers are hereby required to register with the Revenue District Office (RDO) where their principal place of business is located. Moreover, this ruling authorizes the Revenue District Officer of the revenue district where the properties are located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the transfer of the titles to the lots to be received by the developer and the landowners based on their respective allocations pursuant to the partition without need of presentation of proof of payment of the capital gains tax or the creditable Withholding Tax, Documentary Stamp Tax and Value-Added Tax and/or Donor's 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. TAHCEc Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service