Mr. Johnny O. Sy

June 19, 2008 BIR RULING [DA-371-08] Section 22 (B); DA-450-2004 Mr. Johnny O. Sy Mr. Harry L. Yu # 1407 Quezon Avenue Quezon City Gentlemen : This refers to your undated letter requesting a confirmatory ruling to the effect that the Subdivision Contract/Joint Venture Agreement (JVA) between you, the landowners and DIZON LANDS REALTY AND DEVELOPMENT CORPORATION (Dizon Lands, for short) will have the following tax consequences: 1. The Subdivision Contract/JVA will not create a separate taxable joint-venture within the meaning of Section 22 (B), in relation to Section 27 (A) of the Tax Code of 1997, as amended; and 2. Since the Subdivision Contract/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. It is represented that JOHNNY O. SY and HARRY L. YU are the registered co-owners of a parcel of land situated in Brgy. San Agustin, San Fernando, Pampanga consisting of 51,796 square meters and covered by Transfer Certificate of Title (TCT) No. 419874-R, Lot 11-C of the Registry of Deeds for Pampanga; that DIZON LANDS is a corporation duly organized and existing under and by virtue of Philippine Laws with office address at Angeles-Magalang Road, Pandan, Angeles City; that DIZON LANDS offered and the landowners have agreed to the development of the property by the developer into a residential subdivision to be known as CIUDAD de HIZON; and that under their subdivision contract executed on June 5, 2007, are the following terms and conditions, among other things: 1. WHEREAS, the Developer offered and the landowners have agreed to the development of the property by the Developer into a residential subdivision to be known as "Ciudad de Hizon", following the basic principles agreed by the parties hereto; 2. WHEREAS, the Developer has represented that it has the necessary experience, competence, capability and facilities to develop the property and the landowners have agreed to enter into this joint venture on the basis of said representation; 2.4 Develop the property into residential subdivision in accordance with the plans and specifications and design standards as approved by the landowners and by the appropriate government agencies. To this end, the developer shall furnish at its own expense, all material, equipment, labor and services in the development of the property into a residential subdivision project; 7. The saleable lots from this subdivision project shall be titled in the respective name of the parties hereto according to the percentage sharing as provided elsewhere in this Agreement . . .; 8.1 The landowners and the developer have agreed to divide among themselves the net saleable area out of the 51,796 square meters, wherein 60% of the net saleable area shall become the exclusive property of the developer while 40% of which shall be the exclusive property of the landowners. 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 participation ), 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 the clear provision of Section 22 (B) which clearly manifests the intention of the legislature to exclude from the definition of taxable corporation joint venture/s (or consortium) formed for the purpose of undertaking construction projects, this Office hereby confirms your opinion that the joint venture of JOHNNY O. SY and HARRY L. YU (the landowners) and DIZON LANDS (the developer) is not a corporation subject to corporate income tax. However, for VAT purpose, the joint venture (or consortium) is by itself a taxable entity. 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 contributions constitute their capital contribution to the joint venture project. The transfer 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 saleable lots of the Project between you, the landowners and Dizon Lands 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 Subdivision Contract whereby you and Dizon Lands 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