BIR Ruling [DA-440-04]

August 18, 2004 BIR RULING [DA-440-04] Casimiro Development Corporation 2nd Floor Casimiro Building Alabang-Zapote Road Zapote, Las Pias City Attention: Mr. Teofilo P. Casimiro President Gentlemen : This refers to your letter dated August 13, 2004 stating that Nueva Villa Realty and Development Corporation (NVRDC) is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) with principal office address at 945 Don Isidro Street, Malate, Manila; that on the other hand, Casimiro Development Corporation (CDC) is likewise a domestic corporation duly registered with the SEC; that NVRDC is the absolute and registered owner of a parcel of land covered by TCT No. T-30083 issued by the Registry of Deeds for Tagaytay City containing an area of 60,709 square meters; that NVRDC has subdivided the property into 432 units of salable lots with an area of 44,756 square meters covered by individual transfer certificates of title issued by the Registry of Deeds for Tagaytay City; that NVRDC has partially developed the property under the project name "Nueva Villa Country Estate Subdivision" covered by Development Permit No. REM-90369 issued by the Housing and Land Use Regulatory Board (HLURB) on October 10, 1989 in accordance with the subdivision plan approved by the Land Management Bureau; that on April 6, 2004, a Joint Venture Agreement (JVA) was entered into by and between NVRDC and CDC; that the salient features of the JVA are as follows: 1. CDC undertakes to complete the land development of the property into a middle income subdivision project by altering the subdivision plan to upgrade the same to the minimum design standards of P.D. 957; 2. CDC further assumes sole responsibility to maintain at its own account the developed subdivision and its facilities until such time the road and open spaces are turned-over to the local government or the homeowners' association. Furthermore, CDC shall assume all types of public responsibility for the project except those that pertain to previous commitments and obligations of NVRDC to buyers for lots sold prior to the date of this JVA; 3. The share of NVRDC in the joint venture project shall be equivalent to the Net Sales Value of P50,275,601.60 in the form of houses and lots per the LIST OF NVRDC SHARE OF HOUSE AND LOT UNITS and incorporated as an integral part of this agreement and in the form of CASH in the amount of P101,286.60. The above Net Sales Value is the amount after deducting the cost of marketing management, sales commissions, advertising and promotions from the Gross Sales Value of the NVRDC share; 4. All the individual titles corresponding to the share of NVRDC shall be placed/retained in the name and custody of NVRDC. On the other hand, all the individual titles corresponding to the share of the CDC shall be placed in the name and custody of the CDC. All the individual titles of the road lots, open spaces and non-salable areas shall be placed in the name and custody of the CDC; and 5. Upon issuance of the respective individual titles of the salable lots and the issuance of the license to sell, CDC shall have the exclusive authority to market the share of salable house and lots of NVRDC. The NVRDC share of individual titles, as requested by CDC, shall be released by NVRDC to CDC subject to the payment of the NVRDC share of the net sales proceeds. In this regard, the assignment of a portion of the buyer's housing loan proceeds covered by a letter of guaranty from the financial institution shall be considered as payment of the NVRDC share in net sales proceeds. Based on the foregoing representations, you now request confirmation of your opinion that the JVA entered into by NVRDC and CDC is not subject to capital gains tax, value-added tax, corporate income tax and documentary stamp tax. In reply thereto, please be informed that 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. It is to be emphasized, however, that P.D. 929 excluded joint venture formed for the purpose of undertaking construction projects from the definition of the term "Corporation" because (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; and (4) To assist them in achieving competitiveness with foreign contractors. AEScHa 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 holds that the JVA entered into by the CDC and NVRDC for the development and subdivision of the aforesaid property into a residential townhouse subdivision known as the Nueva Villa Country Estate Subdivision is not subject to the corporate income tax under Section 27 (A) of the Tax Code of 1997. Moreover, the transfer of the property by the NVRDC to CDC, as the Developer, pursuant to their JVA is not subject to the capital gains tax and to the documentary stamp tax under Sections 24 (D) (1) and 196 of the Tax Code of 1997. However, the certification is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the said Code. However, the co-venturers are separately subject to the regular corporate income taxes on their respective taxable income during each taxable year derived by them from the aforesaid construction project. Moreover, the JVA entered into by and between the NVRDC and CDC is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the Tax Code of 1997. However, the sale of the said real property shall be subject to the documentary stamp tax under Section 196 of the said Code. Moreover, the allocation and distribution of their respective shares in the project consisting of developed lots and the housing structures built thereon in consideration of their respective contributions, as stipulated in the 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. (BIR Ruling Nos. 10-96 dated January 23, 1996; DA065-97 dated February 10, 1997; DA286-98 dated June 29, 1998) Furthermore, since the partition to be executed by the parties allocating and distributing between them their respective shares in the project in exchange for their respective contributions is without monetary consideration but merely acknowledges and confirms the title and ownership of the above-named parties, NVRDC, as the Owners and CDC, as the Developer, the same is not subject to the value-added tax, income/creditable withholding tax nor to the documentary stamp tax respectively imposed under Sections 106, 24 (c), 27 (A) as implemented by Revenue Regulations No. 2-98, as amended and 196 all of the Tax Code of 1997. IDaEHC However, the sale of the respective share of NVRDC and/or CDC of the aforesaid property shall be subject to the creditable withholding tax, VAT and documentary stamp tax pursuant to Revenue Regulations No. 2-98, as amended, Sections 106 (A) and 196 of the Tax Code of 1997. Finally, this will authorize the Revenue District Officer (RDO) 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 NVRDC and CDC based on their respective allocations pursuant to the partition without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax and value-added 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. Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service