Filinvest Land, Inc.

October 24, 2007 BIR RULING [DA-563-07] Sec. 22 Joint Venture Filinvest Land, Inc. 173 P. Gomez Street San Juan, Metro Manila Attention: Atty. Andrew James Gerard D. Ruiz Tax Counsel Gentlemen : This refers to your letter dated November 28, 2006, requesting confirmation of the various tax consequences arising from a Joint Venture Agreement for construction purposes, between Filinvest Land, Inc. and Benjamin G. Yalung. EcHTDI It is represented that Filinvest Land, Inc. ("FLI" for brevity) is a corporation duly organized and existing under the laws of the Republic of the Philippines, engaged in the business of acquiring, developing, selling, mortgaging, exchanging and leasing real estate of all kinds, including, among others, residential subdivisions. Benjamin G. Yalung (herein referred to as the "Owner") is the absolute and registered owner of nine (9) parcels of land located in Brgy. Calibutbut, Bacolor, Pampanga, specifically Lot Nos. 1, 2, 3, 4, 5, 6, 7, 8 and 16, covered by Transfer Certificates of Title Nos. 609031-R, 642637-R, 642636-R, 642635-R, 642634-R, 642633-R, 642632-R, 286071-R and 396744-R, respectively, of the Registry of Deeds of Pampanga, with an aggregate area of Three Hundred Twenty One Thousand Eight Hundred Seventy Nine Square Meters (321,879 sq. m.), more or less, and is the grantee of a Right of Way over Road Lot 2 with an area of One Thousand Three Hundred Eight Square Meters (1,308 sq.m.), covered by Transfer Certificate of Title No. 403888-R, registered in the name of Juan Nepomuceno and Sons, Inc. CHIaTc On November 23, 2006, FLI, as the developer, entered into a Development Agreement with the Owner for the subdivision and horizontal development of the real property abovementioned. The salient portions of the Development Agreement are as follows: 1. FLI shall undertake the subdivision and horizontal development of the subject real property, which development shall include improvements and facilities as agreed upon; 2. FLI shall shoulder all the equipment, engineering, materials, supplies and labor expenses incurred relative to the subdivision and horizontal development of the said real property; 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 in the name of the Owner; TaDAHE In view of the foregoing, you are requesting confirmation of your opinion as follows: 1. The Development Agreement between FLI and the Owner, for the subdivision and horizontal development of the abovementioned real property located in Brgy. Calibutbut, Bacolor, Pampanga, into a residential subdivision, will not give rise to a taxable joint venture as provided under Section 22 (B), in relation to Section 27 (A), both of the National Internal Revenue Code (NIRC), as amended; TaDSHC 2. The allocation of saleable lots between FLI and the Owner 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, and the Deed of Lot Allocation whereby FLI and the Owner will allocate unto each other their share in the saleable lots in consideration of their respective contributions, shall not be 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 will be made without monetary consideration and will not be 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 Owner 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 35%, in accordance with Section 27 (A) of the NIRC, as amended, and consequently to withholding tax as implemented under Revenue Regulations (RR) No. 2-98, as amended or, for individuals, Capital Gains Tax (CGT) at 6% in accordance with Section 24 (D) (1) of the NIRC, as amended. EDISaA In reply, please be informed as follows: Section 22 (B) of the Tax Code of 1997, as amended, states as follows: "Section 22. Definitions . When used in this Title: xxx xxx xxx (B) The term 'corporation' shall include partnerships, 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. 'General professional partnerships' are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business." (emphasis supplied) STIcEA The abovementioned exemption was initiated under Presidential Decree (PD) No. 929, dated May 4, 1976, which amended the definition of a "taxable" corporation in the Tax Code, as amended, to specifically exclude joint ventures formed for the purpose of undertaking construction projects. Said PD instituted the amendment of the definition of the term "taxable" corporation in recognition of the following situations: (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 local contractors to enter into joint ventures to pool, their limited resources in undertaking big construction projects. Hence, to assist the local contractors in achieving competitiveness with foreign contractors, the joint ventures formed by said local contractors were thus deemed as not falling under the definition of a "taxable" corporation, and thus not subject to income tax. This was, and still is, the intention of the legislature. EIASDT Such being the case, the Development Agreement entered into by and between FLI and the Owner is not subject to the income tax under Section 27 (A) of the Tax Code of 1997, as amended. Moreover, the allocation of the saleable units between FLI and the Owner, which is done effectively in consideration of their respective contributions, does not constitute a taxable event, as no income is actually realized by either FLI and/or the Owner. The Partition Agreement or Deed of Allocation will be executed without consideration, and will not be in connection with any sale between the said parties. As has been ruled by the BIR on numerous occasions, income, in a broad sense, means all wealth which flows into the taxpayer other than as a mere return of capital ( Section 36, RR No. 2 ). FLI and the Owner, both having contributed to the development of the aforementioned real property, did not realize any income upon the allocation of the saleable units. Hence, the allocation of units arising from the Partition Agreement is not subject to income tax, and consequently, to withholding tax. The said allocation, likewise, is not subject to VAT. Under Section 105 of the NIRC, 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. However, by contributing its parcel of land, the Owner neither sells, barters, exchanges goods, property nor renders services to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001; BIR Ruling No. DA-115-2001 dated September 5, 2001). FLI and/or the Owner will only realize income upon their respective sales of the saleable units allocated to each of them. In this regard, said sales to third parties, if ever undertaken by FLI, would be subject to regular (corporate) income tax at 35%, in accordance with Section 27 (A) of the 1997 Tax Code, as amended, and consequently to withholding tax as implemented under Revenue Regulations (RR) No. 2-98, as amended. On the other hand, said sales to third parties, if ever undertaken by the Owner, would be subject to Capital Gains Tax (CGT) at 6%, in accordance with Section 24 (D) (1) of the 1997 Tax Code, as amended. SHaIDE Further, the Partition Agreement or Deed of Allocation whereby FLI and the Owner have allocated unto each other their share in the saleable units in consideration of their respective contributions, is not subject to the DST imposed under Section 196 of the 1997 Tax Code, as amended, considering that, as stated earlier, the allocation is made without monetary consideration and is not in connection with a sale. In this regard, Section 185 of the Revised Documentary Stamp Tax Regulations (Regulations No. 26)provides that "conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable." Accordingly, since the aforementioned Partition Agreement was executed without consideration and was not in connection with a sale between FLI and the Owner, no DST therefore is due and collectible on said Partition Agreement. However, the notarial acknowledgment to said Partition Agreement shall be subject to the DST pursuant to Section 188 of the 1997 Tax Code, as amended, in the amount of P15.00. aAHDIc In connection with the above development agreement, 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. The party to the joint venture who undertakes the development of the project shall file an annual information return and other returns required to be filed with the RDO where it is registered. 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 Landowners 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. EcATDH Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service