Manlangit Maquinto Salomon and De Guzman Law Offices

January 20, 2009 BIR RULING [DA-(C-004) 025-09] 22 (B); DA-373-2008 Manlangit Maquinto Salomon and De Guzman Law Offices 28/F The World Centre 330 Sen. Gil Puyat Avenue Makati City Attention: Atty. Garry V. de Guzman Gentlemen : This refers to your letter dated July 11, 2008 requesting on behalf of your clients, Empire East Land Holdings, Inc. (Empire East) and Megaworld Corporation (Megaworld), the owners/developers of Eastwood Parkview I and One Central Park condominium project (the Project) for confirmation of opinion that: (i) No income tax and documentary stamp tax (DST) under the 1997 Tax Code is due on the issuance of the Condominium Certificates of Title (CCT) covering the condominium units and parking slots (the Subject Units) in the name of Megaworld and Empire East as the developers of the Project pursuant to the Memorandum of Agreement (MOA) dated July 7, 2008 executed between Empire East and Megaworld which MOA is likewise not subject to any tax imposed under the 1997 Tax Code, other than the DST of P15.00 imposed on the notarial acknowledgment; and (ii) No income tax and DST under the Tax Code of 1997 is due on the transfer by Empire East of the parcel of land upon which the Project has been constructed to and in favor of a condominium corporation to be organized in accordance with the MOA. The facts as you represented are as follows: Empire East and Megaworld are both domestic corporations duly organized and existing under and by virtue of the laws of the Republic of the Philippines. Empire East is the registered owner of a certain parcel of land situated within the Eastwood City CyberPark located along E. Rodriguez Jr. Avenue (C-5 Road), Bagumbayan, Quezon City with a total area of 4,374 sq.m., more or less, and covered by Transfer Certificate of Title (TCT) No. N-307598 (the Lot) issued by the Registry of Deeds for Quezon City. Empire East and Megaworld entered into a MOA for the design, development and construction of an integrated residential condominium and multi-level commercial building project to be known as The Eastwood Parkview I and One Central Park on the Lot. AICEDc Under the provisions of the MOA, the parties allocated among themselves: (a) specifically designated shares in the Project, whereby Empire East shall acquire ten percent (10%) of the residential condominium units, commercial condominium units and parking slots in the above-stated Project, while Megaworld shall acquire the remaining ninety percent (90%) thereof, and (b) the cost of construction and condominiumization of such spaces which they individually undertook to finance in the form of cash, property, services and/or other rights or forms of property. Accordingly, to finance the cost of construction and condominiumization of the spaces, Megaworld will provide the funding. After completion of the building and the formation and organization of the condominium corporation, Empire East will transfer the Lot in favor of the condominium corporation as part of the common areas of the Project, for the common management and benefit of the members of the said condominium corporation. The conveyance by Empire East of the Lot will be made without consideration and solely for the purpose of compliance with the requirements of the provisions of Republic Act No. 4726, (the Condominium Act), as amended. The parties intend to have the MOA annotated at the back of TCT No. N-307598, which title covers the Lot, in order to serve notice to and bind third parties as to the existence of the MOA on the concomitant obligations of the parties thereunder. However, the MOA will not of itself transfer title over the Lot as this shall take place only when the condominium corporation is formed and organized and the Lot is transferred to the condominium corporation as part of the common areas. In reply, please be informed as follows: 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. 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 an additional income tax lien. cDTSHE Considering the clear provision of Sec. 22 (B) which manifests the intention of the legislature to exclude from the definition of taxable corporation joint venture/s (or consortium) formed for the purpose of undertaking construction projects, this Office hereby confirms your opinion that the joint venture of Empire East and Megaworld is not a corporation subject to corporate income tax. However, for VAT purposes, the joint venture (or consortium) is by itself a taxable entity. The allocation of the condominium units and parking slots in the Project between Empire East and Megaworld, in consideration of their respective contributions, as stipulated in their MOA is not a taxable event and is not subject to income tax or any withholding tax because the allocation is a mere return of capital that each has contributed. (BIR Ruling No. DA-192-2001 dated October 17, 2001) The transfer is also not subject to VAT since under Section 105 of the Tax Code of 1997, any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders service and any person who imports goods shall be subject to VAT imposed in Sections 106 to 108 of the same Tax Code, as amended. Hence, by contributing its parcel of land, Empire East, neither sells, barters, exchanges goods, property nor renders service to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001) The Memorandum of Sharing whereby Empire East and Megaworld will allocate unto each other their shares in consideration of their respective contributions is not subject to the DST imposed under Section 196 of the Tax Code of 1997, as amended, income tax and any withholding tax because the allocation is made without monetary consideration and is not in connection with a sale. The partition is made merely to segregate the condominium units and parking slots between the parties, as the return of the capital which each has contributed. However, the acknowledgment to said Memorandum of Sharing is subject to the DST pursuant to Section 188 of the Tax Code of 1997, as amended. No income tax and DST under the Tax Code of 1997 is likewise due on the transfer by Empire East of the parcel of land upon which the Project has been constructed to and in favor of a condominium corporation to be organized in accordance with the MOA. The conveyance of the common areas of the Project in favor of the condominium corporation is without monetary consideration and is not in connection with a sale made to the condominium corporation, accordingly, no income was generated and a fortiori, no income and/or creditable withholding tax is payable and collectible. Since the said conveyance is not a sale, it is likewise not subject to VAT imposed under Section 106 of the 1997 Tax Code, as amended, neither will it be subject to the DST on sales or conveyance of real property imposed under Section 196 of the same Code. However, the notarial acknowledgement to the related Deed of Conveyance is subject to DST of P15.00 pursuant to Section 188 of the 1997 Tax Code, as amended. aCcADT It is understood however, that upon 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 expanded withholding tax under RR No. 2-98, as amended by RR No. 6-2001 or capital gains tax under Section 27 (D) (5), as the case may be. Moreover, such sale shall be subject to the DST imposed under Section 196 of the Tax Code of 1997, as amended, based on the gross selling price or fair market value of the properties, whichever is higher. Furthermore, the said sale shall likewise be subject to VAT. This will authorize the Revenue District Officer (RDO) of the revenue district where the property is located to issue the corresponding Certificate Authorizing Registration (CAR) and Tax Clearance Certificate (TCL) involving the transfer of the titles to the parties based on their respective allocations pursuant to the Memorandum of Sharing, without need of the presentation of proof of payment of the expanded withholding tax, value-added tax and the corresponding DST. Provided, that the parties to the joint venture shall cause the Register of Deeds to annotate on the CCTs that a development project is being undertaken on the land and is the object of the joint venture between the parties, and that the afore-stated joint venture is held to be a tax-exempt entity pursuant to this Ruling issued by this Office. Provided further, that parties to the joint venture shall inform the Bureau of Internal Revenue, through the Law Division, of the fulfillment of the requirement on the distribution of the condominium units and parking slots in accordance with the allocation ratio in the Memorandum of Sharing. For this purpose, a compliance report of the project indicating the number of units/parking slots developed/built, the respective CCTs and the party in whose name the corresponding title was issued. (BIR Ruling No. DA-373-2008 dated June 19, 2008) 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service