Atty. Alan B. Quintana

June 19, 2008 BIR RULING [DA-373-08] 22 (B); DA-194-2006 Atty. Alan B. Quintana 2nd Floor, Renaissance Tower Meralco Ave., Pasig City S i r : This refers to your letter dated April 11, 2008 requesting for exemption from capital gains tax, documentary stamp tax and value-added tax on the partition and assignment of subdivision lots under a joint venture arrangement for the development of several parcels of land in Gen. Mariano Alvarez, Cavite. It appears that Credito Asiatic, Inc. (hereinafter referred to as CAI) is the registered and legal owner of seven hundred sixty three (763) parcels of land located at Barangay Kabilang Baybay, Gen. Mariano Alvarez, Cavite with an aggregate area of 306,698 sq.m., more or less, covered by Transfer Certificates of Title (TCTs) issued by the Registry of Deeds for the Province of Cavite (detailed list of the TCTs subject to the joint venture agreement are attached hereto in fifteen (15) pages with the corresponding lot area and location as well as the initial/signature of the co-venturers counsel in every page thereof). CAI entered into a joint venture agreement with Fil-Estate Properties, Inc. (FEPI) for the development of the above-stated properties into a first-class residential subdivision project. CAI will contribute its landholdings, while FEPI being one of the developers of those parcels of land adjacent to or within the immediate area of the subject properties known as the "Southwoods Residential Estate" will finance and infuse technical and development works on the project as its capital contribution. FEPI intends to integrate the aforesaid parcels of land with the adjoining Southwoods Residential Estates. By way of a return on their respective investments in the Project, the co-venturers agreed to share in the net saleable area, whereby FEPI will receive fifty-five percent (55%) of the designated individual lots and the remaining forty-five (45%) will be assigned to CAI. You are now in the process of having the subdivision titles issued and consequently, partitioning and assigning the subdivision lots between the parties representing their separate shares in the returns of the joint venture project. In reply, please be informed as follows: 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. P.D. No. 929 amended the definition of the taxable corporation so 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 Sec. 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 CAI and FEPI is not a corporation subject to corporate income tax. However, for VAT purposes, the joint venture (or consortium) is by itself a taxable entity. The allocation of the developed subdivision lots of the project between CAI and FEPI, in consideration of their respective contributions, as stipulated in their agreement 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 has contributed. (BIR Ruling No. DA-192-2001 dated October 17, 2001) The transfer is also not subject to VAT since under Section 105 of the Tax Code of 1997, 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 imposed in Sections 106 to 108 of the same Tax Code. Hence, by contributing its parcels of land, CAI, neither sell, barter, exchange goods, property nor render services to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001) The Project Partition whereby CAI and FEPI will allocate unto each other their shares in the subdivision lots in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, 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 has contributed. However, the acknowledgment to said Project Partition is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997, as amended. It is understood however, that upon 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 creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001 or capital gains tax under Section 27 (D) (5), as the case may be. Moreover, such sale shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended based on the gross selling price or fair market value of the properties, whichever is higher. Furthermore, the said sale shall likewise be subject to VAT. This will authorize the Revenue District Officer (RDO) of the revenue district where the properties are located to issue the corresponding Certificate Authorizing Registration (CAR) and Tax Clearance Certificate (TCL) involving the transfer of the titles to the parties based on their respective allocations pursuant to the Project 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 TCT that a development project is being undertaken on the land and is the object of the joint venture agreement 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 developed/saleable lots in accordance with the allocation ratio in the joint venture agreement. For this purpose, a compliance report of the project indicating the number of lots developed/built, the respective TCTs 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 ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service