SGV & Co.

August 10, 2007 BIR RULING [DA-437-07] Sec. 22 Joint Venture SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. R.C. Vinzon Gentlemen : This refers to your letter dated January 23, 2007 requesting for confirmation of your opinion on the following issues, viz.: 1. The joint venture by and between Landco Pacific Corporation as Developer and Genvi Agro-Industrial Corporation as Landowner is not subject to income tax under Section 27 of the Tax Code of 1997, as amended, as a separate taxable entity; 2. The assignment of the resultant saleable lots, road lots, parks, easements, open spaces and other common areas by the Landowner to the Developer as the latter's share in the project is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax, because the aforestated assignment is a mere return of capital contribution, and therefore is not a taxable event; 3. The assignment of the resultant saleable lots, road lots, parks, easements, open spaces and other common areas by the Landowner to the Developer as the latter's share in the project is not subject to VAT since under Section 105 of the Tax Code of 1997, 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 imposed in Sections 106 to 108 of the same Tax Code. Hence, by contributing the parcels of land, the Landowner, neither sells, barters, exchanges goods, properties nor renders service to be subject to VAT; 4. Conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable (Section 185, Regulations No. 26). The Supplement to the Agreement is not in connection with a sale made to the joint venture partners. In fact, the purpose of the conveyance to the joint venture partners is the mere return of capital that each has contributed. Accordingly, the Supplement to the Agreement to be executed by the parties whereby they will allocate and distribute among themselves their respective shares in the Project (saleable lots, road lots, parks, easements, open spaces and other common areas) in exchange for their respective contributions, being without monetary consideration is not subject to donor's tax imposed under Section 98 of the Tax Code of 1997, as amended; HTcADC 5. The Supplement to the Agreement whereby the Developer and the Landowner will allocate their respective shares in the saleable lots, road lots, parks, easements, open spaces and other common areas 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, because the allocation is made without monetary consideration and is not in connection with a sale. The allocation is made merely to segregate the saleable area, road lots, parks, easements, open spaces and other common areas between the parties, as the return of the capital which each has contributed; 6. Upon subsequent disposition by the co-venturers of the saleable lots 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 No. 2-98, as amended by Revenue Regulations Nos. 6-2000 and 12-2000. In addition thereto, such sale shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, 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; 7. The transfer without monetary consideration by the joint venture partners of road lots, parks, easements, and open spaces situated in the project subject of the joint venture to the village association is exempt from the capital gains tax and donor's tax; and 8. The conveyance of the land and common areas of the Project in favor of the village association being without monetary consideration and not in connection with a sale made to the village association did not generate income and a fortiori, not subject to income tax and/or creditable withholding tax. Since the said conveyance is not a sale, it is likewise not subject to VAT imposed under Section 106 of the Tax Code of 1997, as amended, neither will it be subject to the documentary stamp tax on sales or conveyance of real property imposed under Section 196 of the same Code. However, the notarial acknowledgement to said Deed of Conveyance is subject to documentary stamp tax of fifteen (P15.00) pursuant to Section 188 of the Tax Code of 1997, as amended. It is represented that a Joint Venture Agreement (JVA) was entered into by and between Genvi Agro-Industrial Corporation as Landowner and Landco Pacific Corporation as Developer. The Landowner is the absolute and registered owner of the real estate properties located in Guadalupe, Cebu City consisting of approximately Two Hundred Hectares (200 hectares) covered by various Transfer Certificates of Title (TCTs), copies hereto attached and made integral part of this ruling. The Developer is a corporation organized and existing under the laws of the Philippines. It has the managerial expertise, experience, organization and financial resources to develop the above-described real estate properties to their highest and best use, yielding optimal profits and ensuring value appreciation over time. aADSIc The salient features of the JVA are as follows: "2.2 The basic terms of the Joint Venture are as follows: (a) The LANDOWNER shall contribute the Property. (b) The DEVELOPER shall provide all the necessary funds (except for Shared Costs as defined in Section 4.3 hereafter), equipment, materials, supplies, planning requirements, development works expertise, management, labor, manpower, supervision and related undertakings to develop and transform the Property into the Project. (c) From the total number of subdivision lots in the Project (individually, an "Individual Lot" and collectively, the "Individual Lots"), the Parties agree to share in the following proportion: (i) The DEVELOPER shall acquire the rights, title and interests in and to such number of Individual Lots having an aggregate value equal to SIXTY PERCENT (60%) of the aggregate fair market value of all the Individual Lots (hereinafter, the "DEVELOPER's Share"); and (ii) The LANDOWNER shall acquire the rights, title and interests in and to such number of Individual Lots having an aggregate value equal to FORTY PERCENT (40%) of the aggregate fair market value of all the Individual Lots (hereinafter, the "LANDOWNER's Share"). For this purpose, the Parties shall mutually agree on the method of allocating the Individual Lots in the Project among themselves and shall execute a Supplement to this Agreement to formalize such allocation, which Supplement shall form an integral part hereof. For purposes of this Agreement, "fair market value" shall be understood to mean the selling price of the Individual Lots, which shall be mutually agreed upon by the Parties. (Hereinafter, the above allotment of Individual Lots shall be referred to as the "Sharing Scheme")." Road lots, parks, easements, open spaces and other common areas shall also be shared by the developer and landowner using the 60%/40% ratio. As soon as the Village Association is created, the said road lots, parks, easements, open spaces and other common areas shall be turned over to the Village Association without any monetary consideration. In reply, please be informed that this Office hereby confirms your opinion 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 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. cSCTEH It is to be emphasized, however, that P.D. 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 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, the JVA entered into by and between the Landowner and the Developer is not subject to the corporate income tax under Section 27 (A) of the Tax Code of 1997 and is not required to file quarterly and final or adjustment/income tax returns. However, the co-venturers are separately subject to the regular income/corporate income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. (BIR Ruling No. DA-194-06 dated March 28, 2006) 2. The allocation and distribution of their respective shares in the Project (saleable lots, road lots, parks, easements, open spaces and other common areas) in consideration for their respective contributions to the said JVA 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 defers 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. However, upon the subsequent disposition by the co-venturers of the said saleable lots 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 No. 2-98, as amended by Revenue Regulations Nos. 6-2000 and 12-2000. In addition thereto, 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. (BIR Ruling No. DA-013-05 dated January 19, 2005) 3. The Deed of Partition to be executed by the parties whereby they will allocate and distribute among themselves their respective shares in the Project (saleable lots, road lots, parks, easements, open spaces and other common areas) in exchange for their respective contributions, being without monetary consideration is not subject to income tax, withholding tax, value-added tax and documentary stamp tax. (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. Conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable (Section 185, Regulations No. 26). The Deed of Partition is not in connection with a sale made to the joint venture partners. In fact, the purpose of the conveyance to the joint venture partners is the mere return of capital that each has contributed. Accordingly, the Deed of Partition to be executed by the parties whereby they will allocate and distribute among themselves their respective shares in the Project (saleable lots, road lots, parks, easements, open spaces and other common areas) in exchange for their respective contributions, being without monetary consideration is not subject to donor's tax imposed under Section 98 of the Tax Code of 1997. (BIR Ruling No. DA-219-06 dated April 7, 2006) SACHcD 5. The transfer without monetary consideration by the joint venture partners of road lots, parks, easements, and open spaces situated in the project subject of the joint venture to the village association is exempt from the capital gains and donor's taxes. a. Transfer is not subject to capital gains, income and withholding taxes. Since the above-mentioned transfer and conveyance of the subject real properties from the joint venture partners to the village association was made without any monetary consideration and is not in connection with a sale made to the village association, no income was generated by the joint venture partners and a fortiori , no creditable withholding tax is payable and collectible. Thus, the Deed of Conveyance is not subject to capital gains tax, income tax and consequently, the creditable withholding tax prescribed by Revenue Regulations No. 2-98, as amended, implementing Section 57 (B) in relation to Section 27 (A) and (D) (5), all of the Tax Code of 1997. (BIR Ruling No. DA-219-06 dated April 7, 2006) It shall be understood, however, that once titles over said common areas are transferred to the village association, subsequent transfer to another entity/person shall be subject to the applicable taxes imposed under the Tax Code, as amended. b. Transfer is not subject to donor's tax. Conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable. (Section 185, Regulations No. 26). The Deed of Conveyance is not in connection with a sale made to the village association. In fact, the purpose of the conveyance to the village association of the subject properties is for the common enjoyment and safety of the subdivision homeowners. Accordingly, the transfer of the saleable lots, road lots, parks, easements, open spaces and other common areas by the Landowner to the Developer as the latter's share in the project without monetary consideration is not subject to donor's tax imposed under Section 98 of the Tax Code of 1997. (BIR Ruling No. DA-219-06 dated April 7, 2006) c. Transfer is not subject to VAT and DST The conveyance of the land and common areas of the Project in favor of the village association being without monetary consideration and is not in connection with a sale made to the village association, no income was generated and a fortiori, no income and/or creditable withholding tax is payable and collectible. Since the said conveyance is not a sale, it is likewise not subject to VAT imposed under Section 106 of the Tax Code of 1997, as amended. Neither will it be subject to the documentary stamp tax on sales or conveyance of real property imposed under Section 196 of the same Code. However, the notarial acknowledgement to said Deed of Conveyance is subject to documentary stamp tax of fifteen (P15.00) pursuant to Section 188 of the Tax Code of 1997, as amended. (DA-040-2001 dated March 20, 2001, DA-194-06 dated March 28, 2006) However, in the event that the road lots, parks, easements, open spaces and other common areas are transferred by the respective co-venturers to person/s other than the village association, then said transfer/s shall be subject to the applicable taxes as imposed under the Tax Code, as amended. In connection with the above construction undertaking, the Joint Venture and the 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 property is 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 above-named Landowner and Developer based on their respective allocations pursuant to the partition and to the village association 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. HTAIcD Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service