Jamaica Realty and Marketing Corporation

October 26, 2007 BIR RULING [DA-570-07] 22 (B) DA-491-2005 Jamaica Realty and Marketing Corporation 101 Aguirre Avenue, B.F. Homes Paraaque City Attention: Clemente J. Aquino, Jr. Executive Vice President and Chief Operating Officer Gentlemen : This refers to your letter dated October 10, 2007 stating that Jamaica Realty and Marketing Corporation, as developer, entered into an agreement with Rodolfo Quintos, et al., as landowner, for the development of the latter's property in Bayambang, Pangasinan into a residential subdivision (now Nueva Esperanza Subdivision); that the landowner is the registered owner of four (4) parcels of land situated in Bayambang Pangasinan with a total area of One Hundred Two Thousand Seventy Two (102,072) square meters, more or less covered by TCT Nos. P-31892 and 197993 and Lot Nos. 1 and 3 under PSU No. 89855; and that under Section 5, Lot Sharing Arrangement of the Memorandum of Agreement dated October 25, 2002, provides, to wit: ATICcS "The saleable area in the subdivision shall be divided at the rate of Thirty Five Percent (35%) for the landowner and Sixty Five Percent (65%) for the developer . . . xxx xxx xxx Upon the division of the developed lots as provided in the preceding paragraph, the Transfer Certificates of Title (TCT) of the lots representing Sixty Five Percent (65%) of the saleable area awarded to the Developer shall be immediately transferred to its name, with all the transfer taxes which may be imposed, clearances, documentation and notarization and other incidental expenses to be borne by the Developer for its own exclusive account." In connection therewith, you now request for a ruling that joint venture between the landowner and Jamaica Realty and Marketing Corporation for the construction of the subdivision project is not a taxable event, hence, not subject to income tax and/or expanded withholding tax, value-added tax (VAT) and documentary stamp tax. DCHIAS In reply, please be informed that pursuant to Section 22 (B) of the Tax Code of 1997, as amended, the term "corporation" includes 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. 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 as additional income tax lien. EIDATc Considering therefore, 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 hereby opines that the joint venture by and between the Owner and the Developer is not subject to income tax under Section 27 of the Tax Code of 1997, as amended. The assignment by the Owner to the Developer of its corresponding share of the resultant subdivision lots in the aforesaid project is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax, because the aforestated assignment is a mere return of capital contribution, and therefore not a taxable event. (BIR Ruling No. DA-192-2001 dated October 17, 2001) cHAaCE The Memorandum of Agreement whereby the Owner and the Developer will allocate 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, as amended, because the allocation is made without monetary consideration and is not in connection with a sale. The allocation is made merely to segregate the saleable area between the parties, as the return of the capital which each has contributed. However, the acknowledgement to said Memorandum of Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997, as amended. (BIR Ruling No. DA-240-2001 dated November 16, 2001) The transfer is also not subject to VAT since under Section 105 of the Tax Code of 1997, 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 imposed in Sections 106 to 108 of the same Tax Code. Hence, by contributing his parcels of land, the Owner, neither sells, barters, exchanges goods, properties 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) aAHSEC It is understood however, that 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 creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001 or capital gains tax under Section 24 (D) (1), as the case may be. Moreover, such sale shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended based on the gross selling price or fair market value of the property, whichever is higher. Furthermore, the said sale shall likewise be subject to VAT. 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 shall be considered as null and void. SETAcC Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service