Co Ferrer & Ang-Co Law Offices

November 7, 2007 BIR RULING [DA-577-07] Co Ferrer & Ang-Co Law Offices 11F Atlanta Centre 31 Annapolis Street Greenhills, San Juan Metro Manila Attention: Atty. Maria Angeli L. Ferrer and Atty. Anna Liza M. Ang-Co Gentlemen : This refers to your letter dated September 13, 2007 stating that SYU Group Ventures and Development Corporation (SYU) is a corporation duly organized and existing under the laws of the Philippines; that it is the registered owner of two (2) parcels of land with an aggregate area of 1,956 square meters (Property) located at 45 Mother Ignacia Avenue, Quezon City, covered by TCT Nos. 297091 and 297092 issued by the Registry of Deeds for Quezon City; that SYU shall enter into a Project Investment Agreement (the Agreement) with different investors for the development and construction of a residential development on the Property; that upon completion, the Project shall consist of 14 townhouses, each of which shall stand on a subdivided lot (the lot and the townhouse referred to collectively as the Townhouse Unit) and the common areas, infrastructure and facilities incident to such development; that the salient provisions of the Agreement are as follows: aSTcCE a. SYU commits to invest by way of capital contribution all its rights and interest in and to the Parcels that will constitute the entire area of the Project. b. Each investor (the Investor) commits to invest by way of capital contribution a portion of the total costs for construction and development of the Project (the Total Project Cost). The investment is in an amount equivalent to a percentage share in the Total Project Cost. The share of each Investor in the Total Project Cost will be computed based on the estimated of the actual cost of the floor area of a particular townhouse unit at a pre-determined rate per square meter. HETDAa c. SYU and the Investors shall appoint Gateway-Nissi Construction Corporation, a corporation organized and existing under Philippine laws, as exclusive project manager (the Project Manager) for the Project for the purpose of managing and supervising the planning, construction and development of the Project. It will be authorized to negotiate and execute contracts with architects, construction engineers, general building contractors and other parties as may be required for the development of the Project, obtain the necessary licenses and permits for the Project, perform marketing and advertising activities for the Project and such other acts as are necessary or required in the expeditious development of the Project. HDAECI d. SYU and the Investors will open a Depositary Account where the capital contributions of the Investors will be held, managed and disbursed by the Project Manager solely for funding the Total Project Cost necessary to develop and complete the Project. e. In consideration of, and in return for, their respective capital contributions to the Project, SYU and the Investors shall receive their respective allocations in the form of Townhouse Units and an undivided pro rata interest in the common areas of the Project. For purposes of determining the allocation of a Party, the Project Manager shall determine the amount contributed by each Investor in relation to the Total Project Cost. The resulting ratio becomes the basis for determining the aggregate value of the Townhouse Units to be allocated to each Investor by applying the resulting ratio to the aggregate gross selling price of all the Townhouse Units in the Project. SYU shall, after such allocation, receive as its own allocation the balance of the Townhouse Units in the Project. ADEHTS f. Following the determination of their respective allocations in accordance with the foregoing formula, the parties shall execute a Deed of Allocation and Partition to effect the distribution of their respective allocated Townhouse Units for the Project. Upon the registration of such Deed of Allocation and Partition with the appropriate Registry of Deeds, the Project Manager shall cause to be subdivided the transfer certificates of title covering the Parcels such that the Townhouse Units shall each be covered by appropriate transfer certificates of title in the name of the party to which such Townhouse Units are allocated. g. After distribution of the Townhouse Units, SYU and each Investor shall maintain separate ownership of their allocated Townhouse Units for lease or sale to third parties. AaCTID h. Prior to the completion of the Project, however, an Investor can assign his participation, rights and proportionate interest in the Project, provided it obtains the written consent of SYU. i. Title to the portions of the Parcels constituting the common areas, right of way, common infrastructure and facilities of the Project shall initially be ceded to SYU. Upon organization of the homeowners' association for the Project, title to such common areas, right of way, common infrastructure and facilities shall be conveyed by SYU to the homeowners' association to be established for the Project in accordance with Presidential Decree (PD) No. 957, as amended (otherwise known as the "Subdivision and Condominium Buyers' Protective Decree). In connection therewith, you now request confirmation of your opinion that STCDaI 1. The joint venture whereby SYU will contribute the Parcels, and the Investors will contribute the construction costs, for the development of the Project into a residential subdivision does not give rise to a taxable joint venture, hence, the joint venture 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 the respective shares of SYU and the Investors in the Project consisting of Townhouse Units in consideration for their respective contributions to the joint venture is not a taxable event, hence, is not subject to income tax under Sections 24 (A) and 27 (A) of the Tax Code, nor creditable withholding tax under Revenue Regulations No. 2-98, nor the VAT under Sections 106 to 108 of the Tax Code, because the allocation is a mere return of capital that each of the parties has contributed to the Project; CAaSHI 3. The Deed of Allocation and Partition to be executed by the parties to evidence the foregoing allocation and distribution among them of their respective shares in the Project in the form of Townhouse Units is without monetary consideration, hence, is not subject to DST under Section 196 of the Tax Code; 4. In the event that SYU and the Investors effect the sale of the Townhouse Units after the ownership thereof has been respectively transferred to them, the sale shall be subject to CGT under Section 24 (D) of the Tax Code (for individuals), CGT under Section 27 (D) (5) or income tax under Section 27 (A) of the Tax Code, and consequently, creditable withholding tax under RR No. 2-98, as amended (for corporations). Further the sale by the Investors engaged in the realty business of said Townhouse Units would likewise be subject to VAT, depending on the selling price of said Townhouse Unit in relation to RR No. 16-2005, as amended. The sale shall further be subject to DST under Section 196 of the Tax Code; ECSHID 5. The assignment of the rights, participation, and proportionate interest of an Investor under the Project Investment Agreement does not equate to a sale of real property, hence, such assignment is not subject to creditable withholding tax under RR No. 2, as amended, CGT imposable on sales of real property under Section 24 (D) (for individuals) and under Section 27 (D) (5) (for corporations), nor VAT under Sections 106 to 108, all of the Tax Code; 6. The transfer to the homeowners' association of title to areas of the Project constituting the common areas, right of way, and the facilities of the Project for the purpose of administering, managing and holding title to such common areas and facilities for the mutual benefit of the residents, not being with monetary consideration and being made pursuant to applicable law, is not subject to income tax under Section 27 (A) of the Tax Code (and consequently, to creditable withholding tax under RR No. 2-98, as amended), VAT under Sections 106 to 108 of the Tax Code, and DST under Section 196 of the Tax Code. Neither is it subject to donor's tax under Section 98 of the Tax Code because of the absence of donative intent; and TcCEDS 7. Consequently, the confirmation of this request will authorize the Revenue District Officer of the revenue district where the Parcels are located to issue the corresponding tax clearance certificates with regard to the transfer of title to the Townhouse Units to be received by SYU and the Investors, or by their assignees, based on their respective allocations pursuant to the Deed of Allocation and Partition, and the transfer of title to the common areas and facilities to be received by the homeowners' association to be established for the Project, without need of presentation of proof of payment of the creditable withholding tax and documentary stamp tax. aDSIHc In reply thereto, please be informed that your opinion is hereby confirmed 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 participation ), 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. DHcSIT 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 Agreement entered into by SYU and the Investors 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. AcIaST 2. The allocation and distribution of the respective shares of the Parties in the Project consisting of Townhouse Units in consideration of their respective contributions, as stipulated in the Agreement is not a taxable event and is not subject to income tax, withholding tax, value-added tax and documentary stamp tax because the allocation is a mere return of capital that each has contributed. 3. The Deed of Partition to be executed by the Parties whereby they allocate and distribute between them their respective shares in the Project in the form of Townhouse Units is without monetary consideration is not subject to the corresponding documentary stamp tax prescribed in Section 196 of the Tax Code of 1997, as amended. CTDacA 4. In the event that SYU and the Investors effect the sale of the Townhouse Units after the ownership thereof has been respectively transferred to them, the sale shall be subject to CGT under Section 24 (D) of the Tax Code (for individuals), CGT under Section 27 (D) (5) or income tax under Section 27 (A) of the Tax Code, and consequently, creditable withholding tax under RR No. 2-98, as amended (for corporations). Further the sale by the Investors engaged in the realty business of said Townhouse Units would likewise be subject to VAT, depending on the selling price of said Townhouse Unit in relation to RR No. 16-2005, as amended. The sale shall further be subject to DST under Section 196 of the Tax Code of 1997. 5. BIR Ruling No. DA-505-05 dated December 16, 2005 , this Office held that "The assignment of the rights, participation and proportionate interest of an investor under the Project Investment Agreement does not equate to a sale, hence, is not taxable as a sale of real property for the following reason: AEcIaH This is due to the fact that in an assignment of rights, the assignee merely steps into the shoes of the assignor without acquiring a better right than what the assignor had in the property to which the rights assigned pertains. A deed of assignment of rights in real property is not a deed of sale of real property itself, but the rights pertaining to such property (BIR Ruling No. DA-252-96 dated July 18, 1996). Since no sale is involved, there is no basis for the imposition of withholding tax under Revenue Regulations No. 2-98, as amended. (BIR Ruling No. 031-01 dated March 15, 2001) In the same vein, there is no basis for the imposition of the CGT or the VAT." Accordingly, the assignment of the rights, participation and proportionate interest of an Investor under the Project Investment Agreement is not subject to CGT imposable on sales of real property under Section 24 (D) (for individuals) and Section 27 (D) (5) (for corporations), nor VAT under Sections 106 to 108 of the Tax Code of 1997, as amended. Provided, however, that the assignment shall not take place at the time the Project is almost completed or has been fully completed but before distribution to the Investors, of their allocated shares; and provided further, that in case the price paid for the assigned rights, participation or interest exceeds the capital contribution/investment of the Assignor, the amount in excess thereof shall be subject to the regular income tax imposed under Sections 24 and 27 of the Tax Code, as applicable, and consequently to the creditable withholding tax. cICHTD 6. The transfer of the homeowners' association of title to areas of the Project constituting the common areas, right of way, and the facilities of the Project for the purpose of administering, managing and holding title to such common areas and facilities for the mutual benefit of the residents, not being with monetary consideration and being made pursuant to applicable law, is not subject to income tax under Section 27 (A) of Tax Code of 1997 and consequently to creditable withholding tax under RR No. 2-98, as amended, VAT under Sections 106 to 108 of the Tax Code and DST under Section 196, supra . Neither is it subject to donor's tax under Section 98, supra , because of the absence of donative intent. cIHDaE 7. This will therefore serve as an authority for the Revenue District Officer of the revenue district where the Parcels are located to issue the corresponding tax clearance certificates with regard to the transfer of title to the Townhouse Units to be received by SYU and the Investors, or by their assignees, based on their respective allocations pursuant to the Deed of Allocation and Partition, and the transfer of title to the common areas and facilities to be received by the homeowners' association to be established for the Project, without need of presentation of proof of payment of the creditable withholding tax and documentary stamp tax. Finally, the joint venture or the party 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 or required to be registered. 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. cTADCH Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service