BIR Ruling [DA-471-04]

September 7, 2004 BIR RULING [DA-471-04] 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 among Filinvest Land, Inc. (FLI for brevity) and the JV Llamas Development Corporation, the Heirs of Adela Villa-Abrille, Emmanuel Coronel, Sr., Cynthia C. Hardy, Abel V.A. Coronel, Reynaldo V.A. Coronel, Emmanuel V.A. Coronel, Jr., Keneth V.A. Coronel, Milagros R. Villa-Abrille and Teresita R. Villa-Abrille for the development of "Fuente de Villa-Abrille 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 residential subdivisions. On the other hand, JV Llamas Development Corporation, the Heirs of Adela Villa-Abrille, Emmanuel Coronel, Sr., Cynthia C. Hardy, Abel V.A. Coronel, Reynaldo V.A. Coronel, Emmanuel V.A. Coronel, Jr., Keneth V.A. Coronel, Milagros R. Villa-Abrille and Teresita R. Villa-Abrille (hereinafter referred to as "the Owners") are the registered owners of twelve (12) parcels of land with an aggregate area of 107,688 sq.m., more or less, and are located at Barangay Matina, Davao City. On April 28, 2003, FLI, as the developer, entered into a Development Agreement with the Owners for the subdivision and horizontal development of the real properties 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 "Fuente de Villa-Abrille 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 Fuente de Villa-Abrille Project; 3. For and in consideration of the development obligations and undertakings it will assume, FLI will receive sixty percent (60%) of the saleable lots which shall result from said subdivision and horizontal development. The remaining forty percent (40%) shall be retained in ownership by the Owners; 4. Upon determination of the saleable lots which would be assigned respectively to FLI and the Owners, FLI and the above-stated Owners will execute a Deed of Allocation to allow the lots pertaining to FLI and the Owners to be registered in their respective names. Upon completion of the afore-mentioned property, FLI and the Owners will enter into a Partition Agreement, whereby the developed saleable lots will be allocated between themselves, based on the terms of the Development Agreement previously executed. The said Partition Agreement will adjudicate the saleable lots between the parties, as part of their respective shares in the Fuente de Villa-Abrille 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 the Owners, for the subdivision and horizontal development of the Fuente de Villa-Abrille 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 the Owners 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 to 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 the Owners will allocate 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 will be 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 the Owners 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 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 venture entered into by and between FLI and the Owners is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. The Owners did not convey or transfer their ownership or interest over the parcels of land when they contributed the aforesaid landholdings 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 the Owners 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 the Owners and FLI will allocate unto each other their share 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 will be made without monetary consideration and is not in connection with a sale. The partition will be 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 shall be 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, or capital gains tax under Section 27(D)(5) and 24(D)(1), as the case may be. 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. AHCTEa 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