IPM Realty & Development Corporation

August 22, 2008 BIR RULING [DA-(C-044) 164-08] 22 (B); DA-586-2007 IPM Realty & Development Corporation Room 804 Ortigas Building, Ortigas Ave. cor Meralco Ave. Pasig City Attention: Atty. Ronnie Ray F. Paraiso Director for Legal Gentlemen : This refers to your letter dated August 4, 2008 requesting for a ruling on: (a) the tax liability of the landowner if it assigns to the developer its corresponding share of subdivision lots in the project and the taxes due thereon; and (b) the tax implication for both parties when they sell the afore-stated lots to their respective buyers. ISHaCD Background The Developer, IPM Realty & Development Corporation, is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines with office address at 804 Ortigas Building, Ortigas Avenue cor Meralco Avenue, Ortigas Center, Pasig City. The Landowner, Laguna Lands and Estate Development Corp., is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines with office address at 2/F Paseo Building, Valle Remedios Subdivision, Halang, Calamba, Laguna. aICcHA The Landowner is the absolute and registered owner of a parcel of land situated in the Municipality of Malolos, Bulacan with an aggregate area of 3,821 square meters, more or less, covered by Transfer Certificate of Title (TCT) No. T-58417 issued by the Register of Deeds for Bulacan. The Landowner, after having been convinced of the capacity and ability of the Developer in the development of prime residential subdivisions, has agreed with the latter for the development of its aforementioned parcel of land. Accordingly, the parties entered into a joint venture agreement on May 9, 2006 in which they agreed to the following: "xxx xxx xxx 1. The DEVELOPER shall, at its own expense, survey and prepare the subdivision plans, engineering designs, and such other plans in accordance with basic guidelines and concepts submitted to the OWNER, together with such other plans subject to the rules and regulations of the Housing and Land Use Regulatory Board (HLURB), Bureau of Lands, and such other government agencies that regulate or control the construction and development of subdivisions. aDIHCT 2. The DEVELOPER shall secure and pay for the necessary licenses, permits, approvals, and cost of bonds from the Local Government Unit/City Government, HLURB, and all other government agencies having authority on residential subdivisions with full cooperation from the OWNER. 3. The DEVELOPER shall develop the property into a residential subdivision in accordance with the plans and specifications and design standards as approved by the OWNER and by the concerned Local Government Unit and HLURB. aHSTID 4. To this end, the DEVELOPER shall furnish at its own expense, all materials, equipment, labor and services in the development of the Property into a residential subdivision project. xxx xxx xxx 8. Any and all fees and expenses for the titling of the Property into subdivision lots shall be exclusively borne by the DEVELOPER without reimbursement from the OWNER. xxx xxx xxx 15. The participation and interest of the parties in the saleable lot shall be Thirty Seven Percent (37%) for the OWNER and Sixty Three Percent (63%) for the DEVELOPER . . . xxx xxx xxx." Thereafter, the Landowner and Developer executed a Supplemental Agreement with Transfer of Real Property dated May 9, 2006 whereby the Landowner and Developer allocated unto each other their share in the saleable area in the project in consideration of their respective contributions, as follows: "1. The OWNER-TRANSFEROR (Owner) by these presents do hereby TRANSFER, CEDE, AND CONVEY the ownership and all its rights, interests, and participation to the DEVELOPER-TRANSFEREE (IPM Realty), and shall bind the parties hereof, their successors and assigns-in-interest over the lots indicated, to wit: BLOCK 1 AREA SHARING Lot-3145-A 211 sq.ms. OWNER-TRANSFEROR Lot-3145-B 207 sq.ms. OWNER-TRANSFEROR Lot-3145-C 128 sq.ms. OWNER-TRANSFEROR Lot-3145-D 132 sq.ms. OWNER-TRANSFEROR Lot-3145-E 131 sq.ms. DEVELOPER-TRANSFEREE Lot-3145-F 131 sq.ms. OWNER-TRANSFEROR Lot-3145-G 131 sq.ms. DEVELOPER-TRANSFEREE Lot-3145-H 131 sq.ms. OWNER-TRANSFEROR Lot-3145-I 140 sq.ms. DEVELOPER-TRANSFEREE BLOCK 2 AREA SHARING Lot-3145-J 141 sq.ms. DEVELOPER-TRANSFEREE Lot-3145-K 200 sq.ms. DEVELOPER-TRANSFEREE Lot-3145-L 195 sq.ms. DEVELOPER-TRANSFEREE Lot-3145-M 124 sq.ms. DEVELOPER-TRANSFEREE Lot-3145-N 39 sq.ms. DEVELOPER-TRANSFEREE BLOCK 3 AREA SHARING Lot-3145-O 327 sq.ms. DEVELOPER-TRANSFEREE Lot-3145-P 324 sq.ms. DEVELOPER-TRANSFEREE Lot-3145-Q 284 sq.ms. DEVELOPER-TRANSFEREE Lot-3145-R 845 sq.ms. DEVELOPER-TRANSFEREE 2. The parties manifest that the transfer of ownership over the above lots from the OWNER-TRANSFEROR (Owner) to the DEVELOPER-TRANSFEREE (IPM Realty) represents the full, complete, and exact interests of herein parties over the Property subject of the Joint Venture Agreement. SaHIEA xxx xxx xxx." [Reference to Owner and IPM Realty Supplied] Given that the assignment by the Landowner to Developer of its corresponding share of subdivision lots in the project is a mere return of the capital contributed by the latter as developer of the project, you are of the position that the assignment is not a taxable event that will give rise to the payment of regular income tax or creditable withholding tax. Moreover, you are of the position that the transfer is also not subject to Value-Added Tax (VAT) since the transfer is not in the ordinary course of business but a mere return of capital contribution. We reply as follows: 1. The Joint Venture Agreement (JVA) executed between Laguna Lands and Estate Development Corp. (LANDOWNER) and IPM Realty & Development Corporation (DEVELOPER) described above is an agreement between the parties for the subdivision and development of the aforementioned parcel of land into a residential subdivision which is neither a contract of sale over real property nor an instrument which conveys title to real property. Hence, no income tax or documentary stamp tax (DST) is due upon the execution of the JVA (Section 186 of Revenue Regulations No. 26). However, the notarial acknowledgment on the JVA is subject to the DST on certification pursuant to Section 188 of the 1997 Tax Code, as amended. (BIR Ruling No. DA-303-2005 dated July 5, 2005) DCISAE Section 22 (B) of the 1997 Tax Code, as amended, provides: "(B) The term corporation shall include partnerships, 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. "General professional partnership" 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." 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. From the foregoing definition of a corporation, this Office is of the opinion that the JVA executed between the parties does not give rise to a taxable joint venture. The parties to a joint venture agreement may file separate income tax returns for their net revenue for the above-mentioned project less their respective proportionate share in the joint venture expenses since the joint venture is not embraced within the meaning of the term "corporation", hence, not subject to the corporate income tax imposed under Section 27 (A) of the 1997 Tax Code, as amended. (BIR Ruling No. 002-97 dated January 14, 1997) 2. The allocation and distribution of the saleable lots to the LANDOWNER and DEVELOPER in accordance with their respective equity contributions as stipulated in the Supplemental Agreement with Transfer of Real Property is not subject to income tax, withholding tax or capital gains tax, since the allocation/distribution is without consideration, not in connection with a sale and constitutes mere return of capital. Likewise, the said allocation and distribution is not subject to DST for want of consideration. SDTcAH It is to be understood, however, that upon subsequent disposition by the parties under the JVA of the individual/subdivided lots allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax rate provided under Section 27 (A) of the 1997 Tax Code, as amended by R.A. No. 9337, capital gains tax imposed under Section 24 (D) of the same Code, and to the creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended. Moreover, said sale shall be subject to the documentary stamp tax imposed under Section 196 of the 1997 Tax Code, 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, as implemented by RR No. 16-2005, as amended by RR 4-2007. (BIR Ruling No. DA-262-2001 dated December 18, 2001) 3. The Supplemental Agreement with Transfer of Real Property whereby the LANDOWNER and DEVELOPER have allocated unto each other their share in the saleable lots in consideration of their respective contributions, are not subject to the DST imposed under Section 196 of the NIRC, as amended, considering that 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 Supplemental Agreement with Transfer of Real Property was executed without consideration and was not in connection with a sale between the LANDOWNER and DEVELOPER, no DST is due and collectible on said Agreement. However, we understand that the notarial acknowledgments to said Supplemental Agreement with Transfer of Real Property shall be subject to the DST pursuant to Section 188 of the NIRC, as amended, in the amount of P15.00. CTSHDI 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. Furthermore, the parties to the joint venture agreement shall cause the Register of Deeds to annotate on the Transfer Certificate of Title or Condominium Certificate of Title, with respect to their respective allocated units/lots, that they hold said units/lots acquired in a tax-exempt joint venture pursuant to a Ruling issued by the Bureau of Internal Revenue. 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. AaECSH Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service