BIR Ruling [DA-706-06]

December 13, 2006 BIR RULING [DA-706-06] 22 (B) Robinsons Homes, Inc . Unit No. 00121 Park Avenue Robinsons Galleria EDSA corner Ortigas Avenue Quezon City Attention: Ms. Marilu M. Alferez Senior Vice President and General Manager Gentlemen : This refers to your letter dated September 4, 2006 stating that on December 15, 2005, Robinsons Homes, Inc. (RHI) and the Heirs of Rosauro Dongallo (Dongallo Heirs) entered into a Joint Venture Agreement (JVA) for the development of several parcels of land located at Barangay Camaman-an, Cagayan de Oro City; that the Dongallo Heirs, as owner, contributed their property with an aggregate area of 82,527 square meters, while RHI agreed to undertake the development of the property into a residential subdivision, as well as the marketing and, in general, the management and operation thereof; that the expenses for the development works, re-survey, consolidation and subdivision of titles are for the account of RHI; that the titles consolidated and re-subdivided remain in the name of the Dongallo Heirs; that RHI shall be responsible for the execution of contracts, collection of proceeds of sales, and the collection of the required taxes; that the marketing of the saleable lots shall be exclusively undertaken by RHI, which includes that determination of marketing policies, pricing, terms, documentation, collection of proceeds, etc.; that the salient feature of the JVA is that RHI shall be entitled to 55% of the saleable lots while the Dongallo Heirs shall be entitled to the other 45% thereof; and that before any selling is done, the parties shall agree on the specific lots to be assigned to each of them. In connection therewith, you now request confirmation of your opinion that 1. The JVA entered into by and between RHI and the Dongallo Heirs does not create a separate taxable entity; 2. The allocation and distribution of the saleable lots to RHI and the Dongallo Heirs is not subject to income tax/expanded withholding tax (EWT), value-added tax (VAT) or gross receipts tax (GRT) and documentary stamp tax; 3. The sale by RHI or the Dongallo Heirs of their respective shares in the saleable lots to third parties is generally subject to income tax, EWT (unless exempt under Republic Act (R.A.) No. 7279 on Socialized Housing and similar acts), DST and VAT (unless exempt under Section 109(w) of the Tax Code of 1997); 4. RHI, which has been designated in the JVA as the exclusive marketing agent for the sale of all saleable lots in the Project, may collect the sales proceeds thereof and withhold and remit the EWT in its own name, notwithstanding the fact that the units sold may pertain to the Dongallo Heirs as the latter's share in the saleable lots, as provided under the JVA; 5. The Revenue District Office (RDO) having jurisdiction over the property is authorized to issue the Tax Clearance/Certificate Authorizing Registration (CAR) with regard to the sale of all saleable lots within the Project." SEACTH In reply, 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 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 is of the opinion as it hereby holds that the JVA entered into by RHI and the Dongallo Heirs 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/individual 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 the saleable lots to RHI and the Dongallo Heirs in consideration of their respective contributions, as stipulated in the JVA 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. Moreover, in the event that RHI, as developer, decides to transfer the title to the property representing its share in the saleable lots under its name, such transfer is still not subject to the aforementioned taxes. 3. However, upon subsequent sale by RHI or the Dongallo Heirs of their respective shares in the saleable lots to third parties, the gain that may be realized by them from such sale will be subject to the regular corporate income tax under Section 27(A) or individual income tax under Section 24(A) of the Tax Code of 1997 and to the creditable withholding tax under Revenue Regulations No. 2-98, as amended, and to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, and to the value-added tax imposed under R.A. No. 9337, as implemented by Revenue Regulations No. 16-2005, unless exempt under Section 109(w), supra . ( 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 ) 4. The JVA provides that the marketing shall be done exclusively by RHI. The term "marketing" includes but is not limited to the determination of marketing policies, pricing, terms and conditions of sale, restrictions to be annotated on the titles of lots, documentation and collection of proceeds of sales. Accordingly, by virtue of the marketing provisions of the JVA, and considering that RHI documents and issues all receipts and invoices relative to all sale in the entire project, RHI may execute the Deed of Absolute Sale in its name in order to transfer title to the property in the name of the buyers with regard to its share in the saleable lots as well as the share of the Dongallo Heirs. Such being the case, the expanded withholding tax may be credited in the name of RHI. 5. This will authorize the Revenue District Officer (RDO) of the revenue district where the property is located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the sale of developed units as prescribed in Revenue Regulations No. 24-2002. 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. DCSETa Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service