BIR Ruling [DA-378-05]

September 5, 2005 BIR RULING [DA-378-05] Ayala Land, Inc . Tower One, Ayala Triangle Ayala Avenue Makati City Attention: Atty. Valerie C Feria Gentlemen : This refers to your letter dated June 23, 2004 stating that Manila Jockey Club, Inc. (MJCI) is a corporation duly organized and existing under Philippine laws; that it is the registered owner of a parcel of land located in Sta. Cruz, Manila with an aggregate gross area of 12,700 square meters covered by TCT No. 252038 (the Project Area);that Laguna Properties Holdings, Inc. (LPHI) is likewise a corporation duly organized and existing under the laws of the Philippines; that MJCI and LPHI executed a Joint Development Agreement (Agreement) for the joint development of the Project Area into a primarily residential complex consisting of condominium buildings and townhouses and their respective utilities and facilities for the use and benefit of the residents or occupants of such buildings or townhouses (the Project);that the Project includes the master planning of the intended development of the Project Area, land development, and design and construction of the internal road network, open space, infrastructure, amenities and facilities of all phases of the Project Area, and the marketing and sale of finished residential units in the Project (Developed Units);that the specific terms of the Agreement are as follows: (a) MJCI shall contribute all its right, title and interest in and to the Project Area; (b) LPHI shall provide the necessary financing to construct and develop the Project and shall be responsible for causing, financing, overseeing and coordinating the performance of all the necessary work for the implementation of the Project; (c) In consideration of an in return for their respective contributions to the Project, LPHI and MJCI shall share in the distribution of the Developed Units comprising the Project proportionate to their respective contributions. In determining each of the parties' respective share in the Project, each Developed Unit shall be assigned a reference value equal to the gross selling price at which such Developed Unit shall be offered for sale to the public (the Reference Value).Each of the parties shall thereafter be allocated their respective shares as follows: (i) MJCI shall receive, as its allocation for the townhouse phase of the Project, Developed Units located therein with an aggregate Reference Value amounting to 12% of the total Reference Value of all townhouse Developed Units in the townhouse phase, computed in the following manner: RV-MJCI(TH) = (12% x R) Where: RV-MJCI(TH) = the Reference Value of MJCI's allocation with respect to the townhouse phase R = the total Reference Value of all Developed Units in the townhouse phase LPHI shall receive, as its allocation for the townhouse phase, Developed Units located therein with an aggregate Reference Value equal to the difference between the total Reference Value of all Developed Units in the townhouse phase and the aggregate Reference Value of MJCI's allocation therein. (ii) All road lots, easements, utilities, facilities and open space in the Project shall be ceded to and registered in the name of LPHI. (d) The parties shall draw their respective allocated Developed Units in the Project by lots. (e) The actual distribution to the parties of the Developed Units received pursuant to their respective allocations shall be effected through the execution of a Deed of Partition for which the parties will execute without monetary consideration. (f) After distribution of the Developed Units, the parties shall maintain separate ownership of their respective allocated Developed Units and may sell or transfer the same to third parties. Based on the foregoing representations, you now request confirmation of your opinion that 1. The joint venture whereby MJCI will contribute the Project Area and LPHI will contribute cash for the development of the entire Project does not give rise to a taxable joint venture, 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 allocation and distribution of their respective shares consisting of Finished Products in the Project in consideration for their respective contributions to the joint venture is not a taxable event, and hence, is not subject to the regular corporate income tax under Section 27(A) of the Tax Code, nor creditable withholding tax under Revenue Regulations No. 2-98, nor the value-added tax under Section 106 of the Tax Code because the allocation is a mere return of capital that each of the parties has contributed to the Project. cADEIa 3. The Deed of Partition to be executed by the parties wherein they allocate and distribute among themselves their respective shares in the Project in exchange for their respective contributions is without monetary consideration, and hence, are not subject to value-added tax under Section 106 of the Tax Code, income/creditable withholding tax under Revenue Regulations No. 2-98, and the documentary stamp tax under Section 196 of the Tax Code. 4. Consequently, the confirmation of this request will authorize the Revenue District Officer (RDO) of the revenue district where the parcels of land are located to issue the corresponding Tax Clearance Certificate with regard to the transfer of the titles to the lots to be received by LPHI and MJCI based on their respective allocations pursuant to the Deed of Partition without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax, and value-added tax. In order to monitor whether the pro rata allocation among the parties as herein described is achieved at the completion of the entire Project, the party receiving its allocation in a particular phase shall submit to the said RDO a certification by an authorized officer of such party indicating the particular lots received as its allocation for such phase and the corresponding aggregate Reference Values of the lots so received. In reply thereto, 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 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. 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 Development Agreements entered into by and among LPHI and MJCI is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997. 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. The allocation and distribution of their respective shares consisting of Finished Products in the Project in consideration for their respective contributions to 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, in the event that any party defer its right to receive a specific allocation to a later phase of the project for as long as such allocation constitutes part of the total return of its capital, such deferment is still not subject to the aforementioned taxes. 3. The Deed of Partition to be executed by the parties whereby they will allocate and distribute among them their respective shares in the project, in exchange for their respective contributions, being without monetary consideration is not subject to value-added tax, income/creditable and documentary stamp taxes. ( BIR Ruling Nos. 207-92 dated July 16, 1992; 349-93 dated July 30, 1993; DA Ruling No. 025-95 dated January 11, 1995 ) 4. This will authorize the Revenue District Officer (RDO) of the revenue district where the properties are located to issue the corresponding Tax Clearance Certificate (TCL) involving the transfer of the titles of the above-mentioned lots in the name of LPHI and MJCI 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. In order to monitor whether the pro-rata allocation among the parties is achieved at the completion of the entire project. Provided, that the party concerned, receiving its allocation in a particular phase shall submit to the said RDO a certification by an authorized officer of such party indicating the particular lots received as its allocation for such phase and the corresponding aggregate Reference Values of the lots so received. However, the subsequent sale by LPHI and MJCI of their respective shares in the saleable lots to third parties, the income that may be realized by them from such sale will be subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997 and to the creditable withholding tax under Revenue Regulations No. 2-98 and to the value-added tax and documentary stamp tax respectively imposed under Sections 106 and 196 both of the Tax Code of 1997. ( BIR Ruling Nos. 274-92 dated September 30, 1992; 010-96 dated January 23, 1996; BIR Ruling Nos. DA065-97 dated February 10, 1997; DA286-98 dated June 29, 1998 ) 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