BIR Ruling [DA-430-05]

October 20, 2005 BIR RULING [DA-430-05] 22 (B); DA-410-2005 Solar Resources, Inc . 16 F. Raffles Corporate Center, Emerald Ave. Ortigas Center, Pasig City Attention: Atty. Ms. Yolanda S. Pedria Vice-President Land Management and Acquisition Gentlemen : This refers to your letter dated August 10, 2005 requesting for a ruling that the two (2) Joint Venture Agreements executed among Solar Resources, Incorporated ("SRI" for brevity) and Westheimer Industries Corporation ("WIC") and Circular Knitting Industries Corporation ("CKIC"),and between SRI and Simplicio Hermogenes, et. al. are not subject to income, creditable withholding, documentary stamp and value-added taxes. The facts, as represented, are as follows: 1. Solar Resources, Inc. is a corporation duly organized and existing under the laws of the Republic of the Philippines, engaged in the business of acquiring, developing and selling real estate, including residential subdivisions; 2. The Westheimer Industries Corporation and Circular Knitting Industries Corporation are the absolute and registered owners in fee simple of several parcels of land, covered by Transfer Certificates of Title (TCT) Nos. 170257 (1,500 sq. m.),184387 (2,000 sq. m.),119233 (5,126 sq. m.),145789 (30,876 sq. m.),145788 (12,111 sq. m.),145787 (9,354 sq. m.),119320 (5,126 sq. m.),and 119412 (5,126 sq. m.) all of the Registry of Deeds of Meycauayan, Bulacan. Said real properties, with a total area of 71,219 square meters, are all located in Barangay Caypombo, Sta. Maria, Province of Bulacan; 3. Simplicio Hermogenes, et. al. ("SH" for brevity) are the absolute and registered owners in fee simple of several parcels of land, covered by TCT Nos. 129252 (M),211573 (M),429083 (M),88.966 (M),81.337 (M),all of the Registry of Deeds of Meycauayan, Bulacan, and by TCT No. 218787 of the Registry of Deeds of Malolos. The said real properties, with a total area of 42,164 square meters, are all located in Barangay Caypombo, Sta. Maria, Province of Bulacan; cEHSIC 4. On February 15, 2005, SRI, as the developer, entered into a Joint Venture Agreement with WIC and CIKC for the subdivision and horizontal development of the latter's 71,219 square meters property located in the Province of Bulacan; 5. A few months later, SRI, also as the developer, likewise entered into a Joint Venture Agreement with SH for the subdivision and horizontal development of the latter's 42,164 square meters property which is located to or adjoining that of WIC and CKIC's property, and also located within Barangay Caypombo, Sta. Maria, Province of Bulacan; and 6. The salient portions of the first and second Joint Venture Agreements ("JVA") are as follows: 1) SRI shall undertake the subdivision and horizontal development of the subject real properties, to be identified as the "Las Palmas Subdivision Project",a residential project, which development shall include improvements and facilities as agreed upon; 2) SRI shall shoulder all the equipment, engineering, materials and labor expenses incurred relative to the subdivision and horizontal development of the Las Palmas Subdivision Project; 3) For and in consideration of the subdivision and development obligations and undertakings it will assume, SRI will receive Sixty percent (60%) of the saleable lots in the project which shall result from said subdivision and horizontal development. The remaining Forty percent (40%) shall be retained in ownership by WIC and CKIC (as to the first JVA)/Simplicio Hermogenes (as to the second JVA); 4) Instead of identifying the lot share of each party and executing a Partition Agreement for this purpose, SRI and WIC and CKIC (as to the first JVA),and SRI and Simplicio Hermogenes (as to the second JVA) agree to register the individual titles of saleable lots under the name of SRI; and 5) SRI and WIC and CKIC (as to the first JVA),and SRI and Simplicio Hermogenes (as to the second JVA) will just share in the proceeds of every lot sale to the extent of Sixty percent (60%) for SRI and Forty percent (40%) for WIC and CKIC (as to the first JVA)/Simplicio Hermogenes. In view of the foregoing, you now request for a confirmation of your opinion that: 1. The two (2) Joint Venture Agreements for the subdivision and horizontal development of the abovementioned real properties into a residential subdivision, will not give rise to a taxable joint venture as provided under Section 22(B), in relation to Section 27(A), both of the National Internal Revenue Code (NIRC), as amended; AEIcTD 2. The 60%/40% allocation of saleable lots between SRI and WIC and CKIC (as to the first JVA);and SRI and Simplicio Hermogenes (as to the second JVA) in consideration of their respective contributions, as stipulated in the joint Venture Agreement, is not a taxable event and is not subject to income tax, and subsequently creditable withholding tax, documentary stamp tax and the Value-Added Tax (VAT),since the allocation of saleable lots is in fact a mere return of capital that each has contributed; 3. The agreement whereby all saleable lots shall be titled and registered under the name of SRI, instead of executing a partition agreement and registering the same under the name of SRI or WIC and CKIC (as to the first JVA)/Simplicio Hermogenes (as to the second JVA) is not subject to the Documentary Stamp Tax (DST) imposed under Section 196 of the NIRC, as amended, nor to any income tax, and consequently withholding tax, since the agreement is made without monetary consideration and is not in connection with a sale. However, it is understood that should SRI and/or WIC and CKIC (as to the first JVA)/Simplicio Hermogenes (as to the second JVA) sell their 60%/40% share in the saleable lots to third parties, the gain that may be realized from said sale will be subject to regular (corporate) income tax at 32% in accordance with Section 24 of the NIRC, as amended, and consequently to withholding tax as implemented under Revenue Regulations (RR) No. 2-98, as amended. In reply, please be informed of the following: 1. The two (2) Joint Venture Agreements executed among SRI and WIC and CKIC (as to the first JVA)/Simplicio Hermogenes (as to the second JVA) as described above are agreements among the parties for the subdivision and horizontal development of parcels of land into a residential subdivision which are neither contracts of sale over real property nor instruments which convey title to real property. Hence, no income tax or documentary stamp tax (DST) is due upon the execution of the Joint Venture Agreements (Section 186 of Revenue Regulations No. 26). However, the notarial acknowledgment on the JVA is subject to the DST on certification pursuant to Section 188 of the 1997 Tax Code. (BIR Ruling No. DA-303-2005 dated July 5, 2005) Section 22(B) of the 1997 Tax Code, provides: "(B) The term corporation shall include partnerships, 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. "General professional partnership" 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." DEICHc From the foregoing definition of a corporation, we confirm your opinion that the Joint Venture Agreements executed among the parties do not give rise to a taxable joint venture. The parties to a joint venture agreement may file separate income tax returns for their net revenue from the above-mentioned project less their respective proportionate share in the joint venture expenses since the joint venture is not embraced within the meaning of the term "corporation", hence, not subject to the corporate income tax imposed under Section 27(A) of the 1997 Tax Code. (BIR Ruling No. 002-97 dated January 14, 1997) 2. The allocation and distribution of the saleable lots to SRI and WIC and CKIC (as to the first JVA)/Simplicio Hermogenes (as to the second JVA) in accordance with their respective equity contributions as stipulated in the two (2) Joint Venture Agreements is not subject to income tax, withholding tax or capital gains tax, since the allocation/distribution is without consideration, not in connection with a sale and constitutes mere return of capital. Likewise, the said allocation and distribution is not subject to DST for want of consideration: It is to be understood however that upon subsequent disposition by the parties under the Joint Venture Agreements of the individual/subdivided lots allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax rate provided under Section 27(A) of the 1997 Tax Code, capital gains tax imposed under Section 24(D) of the same Code, and to the creditable withholding tax under Revenue Regulations No. 2-98, as last amended by RR No. 30-2003. Moreover, said sale shall be subject to the documentary stamp tax imposed under Section 196 of the 1997 Tax Code 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. (BIR Ruling No. DA-262-2001 dated December 18, 2001) 3. The agreement whereby all saleable lots shall be titled and registered under the name of SRI, instead of executing a partition agreement and registering the same under the name of SRI or WIC and CKIC (as to the first JVA)/Simplicio Hermogenes (as to the second JVA) SRI, is not subject to the DST imposed under Section 196 of the NIRC, as amended, considering that 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 were not taxable." Accordingly, since the Agreements were executed without consideration and were not in connection with a sale among SRI or WIC and CKIC (as to the first JVA)/Simplicio Hermogenes (as to the second JVA), no DST is due and collectible on said Agreement. However, the notarial acknowledgments on said Agreements shall be subject to the DST pursuant to Section 188 of the NIRC, as amended, in the amount of P15.00. 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. cADEHI Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service