Shangri-la Hotels and Resorts

September 19, 2008 BIR RULING [DA-(C-074) 242-08] 22 (B); DA-373-2008 Shangri-la Hotels and Resorts EDSA cor. Shaw Blvd. Mandaluyong City Attention: Mr. Kin Sun Ng Group Financial Controller Atty. Federico G. Noel, Jr. Corporate Legal Counsel Gentlemen : This refers to letter dated September 1, 2008 requesting confirmation of your opinion on the following issues: 1. The joint venture by and between Shang Global City Properties, Inc. (the "Landowner") and Fort Bonifacio Shangri-La Hotel, Inc. (the "Developer") is not subject to the Regular Corporate Income Tax (RCIT) under Section 27 (A) of the 1997 Tax Code, as amended; 2. The assignment by the Landowner of its parcel of land is not a taxable event that will give rise to the payment of RCIT/creditable withholding tax, because the said assignment is merely a transaction to effect its capital contribution to the joint venture and not a taxable event. The transfer of the parcel of land by the Landowner is also not subject to value-added tax (VAT) since 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 imposed in Sections 106 to 108 of the same Tax Code, as amended. Hence, by contributing its parcel of land, the Landowner, neither sells, barters, exchanges goods, property nor renders services to be subject to VAT; 3. The allocation and distribution of the Net Saleable Area (NSA) of the Residential Area and of the parking slots between the Landowner and Developer, in consideration for their respective contributions, is not a taxable event and is not subject to income tax, withholding tax, VAT and documentary stamp tax (DST) because the allocation is a mere return of capital that each has contributed; ITEcAD 4. Upon subsequent disposition by the co-venturers of the NSA of the Residential Area allocated to them, the gain that may be realized by them from such sale will be subject to the creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001. Moreover, such sale shall be subject to the DST 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 be subject to VAT; and cIaHDA 5. The conveyance of the common areas in the condominium project to the Condominium Corporation will be made without monetary consideration and not in connection with a sale made to the Condominium Corporation, as such 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 acknowledgment to the related Deed of Conveyance is subject to the DST of P15.00 pursuant to Section 188 of the 1997 Tax Code, as amended. The facts as represented are as follows: A Memorandum of Agreement (MOA) for the development of a five-star hotel (the "Hotel Area") and high-end residences (the "Residential Area") with parking facilities and other necessary amenities (hereinafter referred to as the "Project"), was entered into by Shang Global City Properties, Inc. as Landowner and Fort Bonifacio Shangri-La Hotel, Inc. as Developer. HcaATE The Landowner is a corporation organized and existing under and by virtue of the laws of the Philippines. It purchased from Fort Bonifacio Development Corporation (FBDC) a parcel of land within the West Super Block of the Global City, particularly Lot 1 of Pcs-00-73688, under Transfer Certificate of Title No. 1763-P of the Registry of Deeds of the City of Taguig, with an area of approximately fifteen thousand one hundred twenty (15,120) square meters, more or less (hereinafter referred to as the "Property"). The Developer is a corporation organized and existing under and by virtue of the laws of the Philippines. It has the funds necessary to defray the construction cost of the Project. The funding for the construction of the Project shall be deemed to include the contract prices for the general construction and various specialty contractor packages, professional fees and related expenses for the architectural design, engineering, interior design, legal consultancy fees and such other professional service fees, the cost of obtaining building and all other government permits for the construction of the Project, the cost of registering the Project as a condominium project and real property taxes on the Property during the construction of the Project. The Developer shall also provide technical and consultancy services relative to the construction management thereof. The salient features of the MOA are as follows: "Section 3. Allocation of the Project . 3.1 Intention. It is the intention of the Parties to allocate the resulting units in the Project between them, with each party taking ownership and possession of its respective allocated units (hereinafter the "Allocated Units"), with full power and discretion on the disposition of the same, subject only the pertinent conditions hereunder contained. The Hotel Area, together with its amenities and/or facilities shall be allocated exclusively to the DEVELOPER. EAHDac 3.2 Allocation of Residential Areas. The allocation between the Parties of the Net Saleable Area (NSA) of the Residential Area shall be as follows: Residential Area (%) Landowner 32 Developer 68 The foregoing shall be subject to adjustment based on mutual agreement of the Parties. The actual designation of the Parties' respective Allocated Units of the Residential Area shall be determined upon completion of the final plans and shall be incorporated in a supplemental agreement to be executed by the Parties. 3.3 Allocation of Parking Slots. The Parties agree that the parking slots of the Hotel Area shall be allocated exclusively to the DEVELOPER and the parking slots of the Residential Area shall be allocated as stated below, subject to adjustment based on mutual agreement of the Parties. No. of Slots (%) Landowner 32 Developer 68 The actual designation of the parking slots shall be determined upon completion of the final plans and shall be incorporated in a supplemental agreement to be executed by the Parties. 3.4 Common Areas. The Common Areas shall refer to any area or facility of the Project other than the Allocated Units, which is used, maintained and operated for the common benefit of the Condominium Corporation. The Common Areas shall be expressly defined in the Master Deed with Declaration of Restrictions." In reply, please be informed that this Office hereby confirms your opinion 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. STECDc It is to be emphasized, however, that Presidential Decree (P.D.) No. 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 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 holds that the MOA entered into by and between the Landowner and the Developer is not subject to the corporate income tax under Section 27 (A) of the Tax Code of 1997. However, for VAT purposes, the joint venture (or consortium) is by itself a taxable entity. (BIR Ruling No. DA-373-2008 dated June 19, 2008) Moreover, 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. 2. The assignment by the Landowner of its parcel of land is not a taxable event that will give rise to the payment of RCIT/creditable withholding tax, because the said assignment is merely a transaction to effect its capital contribution to the joint venture and not a taxable event. The transfer is also not subject to VAT since 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 imposed in Sections 106 to 108 of the same Tax Code. Hence, by contributing its parcel of land, the Landowner, neither sells, barters, exchanges goods, property nor renders services to be subject to VAT. 3. The allocation and distribution of the NSA of the Residential Area and of the parking slots between the Landowner and Developer, in consideration of their respective contributions, as stipulated in the 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-065-08 dated February 1, 2008; BIR Ruling No. DA-240-2001 dated November 16, 2001) 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). The Landowner and the Developer, both having contributed to the development of the aforementioned real property, did not realize any income upon the allocation of the NSA of the Residential Area and of the parking slots. Hence, the allocation of units is not subject to income tax, and consequently to withholding tax. The said allocation, likewise, is not subject to VAT. (BIR Ruling No. DA-023-07 dated January 17, 2007; BIR Ruling No. DA-065-08 dated February 1, 2008) CDAHIT 4. 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 creditable withholding tax under RR No. 2-98, as amended by RR No. 6-2001. Moreover, such sale shall be subject to the DST 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. (BIR Ruling No. DA-114-07 dated February 22, 2007; BIR Ruling No. DA-065-08 dated February 1, 2008) 5. 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. 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) with regard to the (a) transfer of the titles to be received by the above-named Landowner and Developer based on their respective allocations pursuant to their agreement and (b) transfer of the titles of the common areas to the Condominium Corporation, without need of presentation of proof of payment of the creditable withholding tax, VAT and the corresponding DST. Provided, that the parties to the joint venture shall cause the Register of Deeds to annotate on the TCT/CCT that a development project is being undertaken on the land and is the object of the joint venture agreement between the parties, and that the 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 NSA in accordance with the allocation ratio in the MOA. For this purpose, a compliance report of the project indicating the number of units/parking slots, the respective CCTs and the party in whose name the corresponding title was issued. SIDEaA 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