Quiason Makalintal Barot Torres Ibarra & Sison

January 26, 2010 BIR RULING [DA-(JV-005) 012-10] 22 (B); DA-586-2007 Quiason Makalintal Barot Torres Ibarra & Sison 21st Floor, Robinsons-Equitable Tower 4 ADB Avenue corner Pedro Poveda Street 1605 Ortigas Center, Pasig City, Philippines Attention: Attys. Benedict R. Tugonon and Amelia Cristina V. Martinez Gentlemen : This refers to your letter dated December 3, 2009 requesting on behalf of your client, Guevant Industrial Development Corporation ("GIDC") for confirmation of your opinion on the tax consequences of the Joint Venture Agreement entered into between GIDC and Honeycomb Builders, Inc. The facts are as follows: Guevant Industrial Development Corporation ("GIDC") is a corporation duly organized and existing under the laws of the Republic of the Philippines. It is the absolute and registered owner of a parcel of land located at the corner of C. Aguila and Second Street, San Miguel, Manila with a total area of Eight Hundred Ninety Six (896) square meters, more or less, and covered by and more particularly described in Transfer Certificate of Title No. 109377 issued by the Registry of Deeds for the City of Manila (the "Property") which shall be developed into a five-storey mixed-use condominium project (the "Condominium Project"). Honeycomb Builders, Inc. ("HBI") is a corporation duly organized and existing under the laws of the Republic of the Philippines, and is engaged in the business of acquiring, developing and selling real estate, including commercial lots and residential condominiums. On March 16, 2009, GIDC and HBI entered into a Joint Venture Agreement (JVA) for the construction of the Condominium Project on GIDC's Property. Pursuant to the JVA, GIDC will contribute the Property as contribution to the Condominium Project. In consideration of such contribution, GIDC shall be entitled to a share in the Condominium Project, specifically full ownership to the condominium units/spaces on the ground floor and the mezzanine floor of the Condominium Project, except all the open spaces/units on these floors, and an additional fifteen (15) parking spaces appurtenant thereto. HBI, on the other hand, commits to develop the Property into the Condominium Project. It shall invest, as its contribution to the Condominium Project, the development works and the related and relevant financing thereof. As a return of capital, HBI shall be entitled to full ownership of the condominium units/spaces in the Condominium Project from the second floor to the fifth floor, except open spaces/areas therein, and all the basement parking slots. cCAIES Based on the foregoing, you now seek confirmation that: 1. The JVA entered into by GIDC and HBI will not give rise to a separate taxable joint venture within the meaning of Section 22 (B), in relation to Section 27 (A) of the 1997 Tax Code, as amended. Hence, the joint venture created by the parties is not subject to the corporate income tax under Section 27 of the 1997 Tax Code. 2. The conveyance of the Property by GIDC, as its contribution to the Condominium Project is not a taxable event; thus not subject to income tax/creditable withholding tax, value-added tax ("VAT") under Section 105 of the 1997 Tax Code, and documentary stamp tax ("DST") under Section 196 of the 1997 Tax Code. 3. The distribution of the condominium units and the appurtenant parking slots to GIDC, as a return of its contribution, is not a taxable event; thus not subject to income tax/creditable withholding tax, capital gains tax, VAT and DST under Section 196 of the 1997 Tax Code. 4. The conveyance of the common areas in the condominium corporation without any monetary consideration to a condominium corporation is not a taxable event; thus not subject to income tax/creditable withholding tax, VAT and DST under Section 196 of the 1997 Tax Code. We reply as follows: 1. The JVA executed between GIDC, as the LANDOWNER and HBI, as the DEVELOPER described above is an agreement between the parties for the development of the parcel of land into a five (5) storey mixed-use condominium project 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) Section 22 (B) of the 1997 Tax Code, as amended, provides: cEaSHC "(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. 928 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, we confirm your 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 conveyance of the parcel of land by GIDC, as its capital contribution to the condominium project is not considered as a taxable event, thus it is not subject to income tax/creditable withholding tax, value-added tax ("VAT") under Section 105 of the 1997 Tax Code, and documentary stamp tax ("DST") under Section 196 of the 1997 Tax Code. 3. The allocation and distribution of the condominium units and the appurtenant parking slots to GIDC in accordance with its equity contributions as stipulated in the JVA is not subject to income tax, withholding tax, capital gains tax or VAT, 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. HIaSDc 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 ) 4. The conveyance of the common areas in the condominium corporation without any monetary consideration to a condominium corporation is likewise not a taxable event, thus not subject to income tax/creditable withholding tax, VAT and DST under Section 196 of the 1997 Tax Code. The conveyance of the parcel of land will be made without any monetary consideration and is not in connection with a sale made to the condominium corporation, thus no income was generated and a fortiori , no creditable withholding tax prescribed by Revenue Regulations (RR) No. 2-98, as amended, implementing Section 57 (B) of the Tax Code of 1997 or capital gains tax under Section 27 (D) (5) of the same Code, is payable and collectible. (BIR Ruling No. DA-164-98 dated April 22, 1998 ) Moreover, 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." Thus, the aforesaid conveyance is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended. However, the notarial acknowledgement to said Deed of conveyance is subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code of 1997, as amended. (BIR Ruling Nos. DA-184-2001 dated October 10, 2001 and DA-505-2005 dated December 16, 2005 ) 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group