Filinvest Land, Inc.

December 18, 2007 BIR RULING [DA-657-07] 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 April 2, 2007, requesting confirmation of the various tax consequences arising from a Joint Venture Agreement for construction purposes, between Filinvest Land, Inc. and Metro Clark Realty, Inc. 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. ADcSHC On the other hand, Metro Clark Realty, Inc. ("MCRI" for brevity) is the owner of two (2) parcels of land located in Barangay Sta. Maria, Mabalacat, Pampanga, specifically Lot Nos. 1 and 194-A, covered by Transfer Certificates of Title (TCT) Nos. 485003-R and 468327-R, with an aggregate area of 526,976 square meters (m 2 ), more or less (hereinafter collectively referred to as the "Properties"). On March 21, 2007, FLI, as the developer, agreed to undertake a joint venture with MCRI for the subdivision and horizontal development of the real property abovementioned. MCRI would contribute 519,476 m 2 of the abovementioned real properties (the entire Lot Nos. 1, covered by TCT No. 485003-R and a portion of Lot 194-A, consisting of 255,988 m 2 , covered by TCT No. 468327-R) to the joint venture undertaking, while FLI would undertake to develop said real properties. The salient portions of the joint venture 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 allocated to MCRI; In view of the foregoing, you are requesting confirmation of your opinion as follows: SDHacT 1. The Development Agreement between FLI and MCRI, for the subdivision and horizontal development of the abovementioned real property located in Barangay Sta. Maria, Mabalacat, 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; 2. The allocation of saleable lots between FLI and MCRI 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 MCRI 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 MCRI 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. In reply, please be informed as follows: EIcSTD 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) 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. EAHDac Such being the case, the Development Agreement entered into by and between FLI and MCRI 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 MCRI, 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 MCRI. 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 MCRI, having contributed to the development of the aforementioned real properties, will 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 1997 Tax Code, 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 the parcels of land, MCRI 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 MCRI 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 and/or MCRI, would be subject to regular (corporate) income tax at the rate of 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. The said sales by FLI and/or MCRI to third parties would likewise be subject to the VAT at the rate of 12%, in accordance with Sections 106 and 109 of the 1997 Tax Code, as amended, and to the Documentary Stamp Tax (DST) at the rate fifteen pesos (P15.00) for each one thousand pesos (P1,000.00), or fractional part thereof in excess of one thousand pesos (P1,000.00) of such consideration or value, in accordance with Section 196 of the 1997 Tax Code, as amended. acHITE Further, the Partition Agreement or Deed of Allocation whereby FLI and MCRI will allocate 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 will be executed without consideration and not in connection with a sale between FLI and MCRI, no DST therefore is due and collectible on said Partition Agreement or Deed of Allocation. However, the notarial acknowledgment to said Partition Agreement or Deed of Allocation shall be subject to the DST pursuant to Section 188 of the 1997 Tax Code, as amended, in the amount of P15.00. SIcCEA In connection with the above construction undertaking, 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. 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 FLI and MCRI based on their respective allocations pursuant to the partition 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. HCIaDT Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service