BIR Ruling [DA-504-04]

September 28, 2004 BIR RULING [DA-504-04] Ayala Land, Inc. Tower One, Ayala Triangle Ayala Avenue Makati City Attention: Atty. Valerie C. Feria Gentlemen : This refers to your letter dated August 16, 2004 stating that Community Innovations, Inc. (CII) and Quick River Ventures, Inc. (QRVI) are both corporations duly organized and existing under the laws of the Philippines, that QRVI is the registered owner of a parcel of land located in Barangay Lankiwan, Municipality of Bian, Laguna with an aggregate area of 10,000 square meters covered by TCT No. T-545272 issued by the Registry of Deeds for Calamba; that QRVI and CII executed a Joint Development Agreement (the Agreement) for the joint development of the Project Land Area covered by the Agreement as part of Verdana Homes Mamplasan, a residential subdivision located in Bian, Laguna (the Project); that the Project shall consist of the planning, construction and development of the Project Land Area to form part of Verdana Homes Mamplasan and the subdivision of the Project Land Area into Finished Products and saleable housing units to be marketed and sold to purchasers thereof; that the specific terms of the Agreement are as follows: a) CII and QRVI shall respectively contribute and pool together their respective undivided interests in and rights appurtenant to the Project Land Area; b) CII shall provide the necessary financing to construct and develop the Project and shall be responsible for causing, financing, overseeing and coordinating the performance of all the necessary work for the implementation of the Project; c) In consideration of and in return for their respective contributions to the Project, CII and QRVI shall share in the distribution of the Finished Products comprising the Project proportionate to their respective contributions. In determining each of the parties' respective shares in the Project, each Finished Product shall be assigned a reference value equal to the gross selling price at which such Finished Product shall be offered for sale to the public (the Reference Value). Each of the parties shall thereafter be allocated their respective shares as follows: (i) QRVI shall receive such number of whole Finished Products with an aggregate Reference Value equal to or not exceeding 6.41% of the aggregate Reference Value of all Finished Products in the Project; (ii) CII shall receive such number of whole Finished Products with an aggregate Reference Value equal to or not exceeding 93.59% of all Finished Products in the Project; (iii) QRVI shall retain title to and ownership of all the areas of the Project which are reserved for roads and open spaces or for the establishment and operation of facilities, structures or utilities intended for the common use of the Project until these are turned over to the homeowners' association of the Project. d) The parties shall agree on the implementing details pertaining to the manner of distribution of each party's respective allocation of Finished Products immediately after the execution of the Agreement; e) The actual distribution to the parties of the Finished Products received pursuant to their respective allocations shall be effected through the execution of a Deed of Partition for which the parties will execute without monetary consideration; and f) After distribution of the Finished Products, the parties shall maintain separate ownership of their respective allocated Finished products and may sell or transfer the same to third parties. In connection therewith, you now request confirmation of your opinion that "1. The joint venture whereby QRVI will contribute the Project Land Area and CII will contribute cash for the development of the entire Project does not give rise to a taxable joint venture, hence, is not subject to corporate income tax pursuant to Section 22(B) in relation to Section 27(A) of the Tax Code; "2. The allocation and distribution of their respective share consisting of Finished Products in the Project in consideration for their respective contributions to the joint venture is not a taxable event, and hence, is not subject to the regular corporate income tax under Section 27(A) of the Tax Code, nor creditable withholding tax under Revenue Regulations No. 2-98, nor the value-added tax under Section 106 of the Tax Code because the allocation is a mere return of capital that each of the parties has contributed to the Project; "3. The Deed of Partition to be executed by the parties whereby they allocate and distribute among themselves their respective shares in the Project in exchange for their respective contributions is without monetary consideration, and hence, are not subject to value-added tax under Section 106 of the Tax Code, income/creditable withholding tax under Revenue Regulations No. 2-98, and the documentary stamp tax under Section 196 of the Tax Code; and "4. Consequently, the confirmation of this request will authorize the Revenue District Officer (RDO) of the revenue district where the parcels of land are located to issue the corresponding Tax Clearance Certificate with regard to the transfer of the titles to the lots to be received by CII and QRVI based on their respective allocations pursuant to the Deed of Partition without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax, and value-added tax. In order to monitor whether the pro rata allocation among the parties as herein described is achieved at the completion of the entire Project, the party receiving its allocation in a particular phase shall submit to the said RDO a certification by an authorized officer of such party indicating the particular lots received as its allocation for such phase and the corresponding aggregate Reference Values of the lots so received." In reply thereto, please be informed that your opinion is hereby confirmed 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. It is to be emphasized, however, that P.D. 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 holds that the Joint Development Agreement entered into by and between QRVI and CII is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997. However, the co-venturers are separately subject to the regular corporate income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. 2. The allocation and distribution of their respective shares in the project consisting of Finished Products in the Project in consideration for their respective contributions to the said agreement is not a taxable event and is not subject to the regular corporate income tax, creditable withholding tax, value-added tax and documentary stamp tax because the allocation is a mere return of capital that each has contributed. DTaAHS 3. The Deeds of Partition to be executed by the parties in respect of each phase of the project whereby they will allocate and distribute among them their respective shares in the project, in exchange for their respective contributions, being without monetary consideration is not subject to value-added tax, income/creditable and documentary stamp taxes. ( 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. This will authorize the Revenue District Officer (RDO) of the revenue district where the properties are located to issue the corresponding Tax Clearance Certificate (TCL) involving the transfer of the titles of the above-mentioned lots to be received by CII and QRVI based on their respective allocations pursuant to the Deed of Partition, without need of the presentation of proof of payment of the creditable withholding tax, value-added tax and the corresponding documentary stamp tax. In order to monitor whether the pro-rata allocation among the parties is achieved at the completion of the entire project, the party concerned, receiving its allocation in a particular phase shall submit to the said RDO a certification by an authorized officer of such party indicating the particular lots received as its allocation for such phase and the corresponding aggregate Reference Values of the lots so received. ( BIR Ruling Nos. 274-92 dated September 30, 1992; 010-96 dated January 23, 1996; BIR Ruling Nos. DA065-97 dated February 10, 1997; DA286-98 dated June 29, 1998 ) 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