BIR Ruling [DA-470-04]

September 7, 2004 BIR RULING [DA-470-04] 22 (B) DA-431-2004 Filinvest Land, Inc. 173 P. Gomez St. San Juan, Metro Manila Attention: Atty. Andrew James Gerard Dulay Ruiz Tax Counsel Gentlemen : This refers to your letter dated August 2, 2004 requesting for a ruling on the tax consequences of the Development Agreement executed by and between Filinvest Land, Inc. (FLI for brevity) and Highland Realty Philippines Corporation (HRPC for brevity) for the development of "Laeuna de Taal Lakeside Resort Community Project". It appears that FLI is a corporation duly organized and existing under the laws of the Philippines and is engaged in the business of acquiring, developing and selling real estate, including resorts and residential subdivisions. On the other hand, HRPC is the absolute and registered owner of eighteen (18) parcels of land covered by Transfer Certificates of Title (TCT) Nos. T-41504, T-41505, T-41506, T-41507, T-41508, T-41509, T-41510, T-41511, T-41512, T-41513, T-41514, T-41515, T-41516, T-41517, T-41518, T-41519, T-41520, T-41521, T-41522 and T-41523, with an area of 660,226.20 sq.m. and is located at Talisay, Batangas. On April 7, 1997, FLI, as the developer, entered into a Development Agreement with HRPC for the subdivision and horizontal development of the real property aforementioned. The salient portions of the said Development Agreement are as follows: 1. FLI shall undertake the subdivision and horizontal development of the subject real property, to be identified as the "Laeuna de Taal Lakeside Resort Community Project", a residential project, which development shall include improvements and facilities as agreed upon in the Master Plan for Development; 2. FLI shall shoulder all the equipment, engineering, and labor expenses incurred relative to the subdivision and horizontal development of the Laeuna de Taal Lakeside Resort Community Project; 3. For and in consideration of the development obligations and undertakings it will assume, FLI will receive seventy percent (70%) of the saleable lots which shall result from said subdivision and horizontal development. The remaining thirty percent (30%) shall be retained in ownership by the Owner; 4. Upon determination of the saleable lots which would be assigned respectively to FLI and HRPC, FLI and HRPC will execute a Deed of Allocation to allow the lots pertaining to FLI and HRPC to be registered in their respective names. On April 5, 2004, FLI and HRPC entered into a Partition Agreement, whereby the developed saleable lots were allocated between themselves, based on the terms of the Development Agreement previously executed. The said document adjudicated the saleable lots between the parties, as part of their respective shares in the Laeuna de Taal Lakeside Resort Community Project and to allow the registration of said allocated saleable lots in their respective names. Based on the foregoing, you now request for confirmation that: 1. The Development Agreement between FLI and HRPC, for the subdivision and horizontal development of the Laeuna de Taal Lakeside Resort Community Project, will not give rise to a taxable joint venture as provided under Section 22(B), in relation to Section 27(A), both of the Tax Code of 1997; 2. The allocation of saleable lots between FLI and HRPC in consideration of their respective contributions, as stipulated in the Development Agreement, is not a taxable event and is not subject to income tax, and subsequently withholding 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 Partition Agreement whereby FLI and HRPC allocated unto each other their share in the saleable lots in consideration of their respective contributions, 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 allocation is made without monetary consideration and is not in connection with a sale. Rather, the partition is made merely to segregate the saleable lots between the parties, as the return of the capital which each contributed. However, it is understood that should FLI and/or HRPC sell any of the saleable lots allocated to them, 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 as follows: 1. 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. TCIDSa 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 venture entered into by and between FLI and HRPC is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. HRPC, the landowner, did not convey or transfer its ownership or interest over the parcels of land when it contributed the aforesaid landholding to the joint venture but merely pooled said resources to a common fund. The pooled resources are co-owned by the joint venture partners. The said contribution constituted its capital contribution to the joint venture project, therefore, such contribution is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax. The transfer is also not subject to VAT, since the transfer is not in the course of business but a capital contribution. 2. The allocation of saleable lots of the project between HRPC and FLI in consideration of their respective contributions, as stipulated in the Development Agreement is not a taxable event and is not subject to income tax or any withholding tax and VAT, because the allocation is a mere return of capital that each has contributed. 3. The Partition Agreement whereby HRPC and FLI have allocated unto each other their shares in the saleable area in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, 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 contributed. However, the acknowledgment to said Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. However, upon the 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 regular income tax rate under Section 27(A) of the Tax Code of 1997, and to the creditable withholding tax under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001. Moreover, said 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. cDCaHA 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 will be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service