Casimiro Development Corporation

July 9, 2008 BIR RULING [DA-(JV-008) 020-08] 22 (B); DA-194-2006 Casimiro Development Corporation 2nd Fl., Casimiro Bldg. Alabang-Zapote Rd. Zapote, Las Pias City Attention: Mr. Teofilo P. Casimiro Gentlemen : This refers to your letter dated June 25, 2008 requesting for the tax implication of the Joint Venture Agreement (JVA) entered into by Fred V. Gregorio, Nila G. de Leon, Luz G. Cruz, Erlinda G. Ricker, Dalisay G. Hermoso, Rosalino V. Gregorio and Purificacion Ocampo-Gregorio (collectively the Owners) with Casimiro Development Corporation (CDC) for the land and site development and construction of housing units to be known as Westville Homes Phase 3A located at Brgy. Ligas, Bacoor, Cavite. EHaCID It appears that the Owners are the absolute and registered owners in fee simple of a parcel of land covered by Transfer Certificate of Title (TCT) No. T-1202564 issued by the Registry of Deeds for the Province of Cavite with an area of 6,424 sq.m., more or less. Pursuant to their JVA, the Owners will contribute their landholding, while CDC, a domestic corporation engaged in realty development undertook at its own expense the land and site development of the afore-quoted project. In return for their respective contributions, the parties will acquire separate ownership of designated units where the Owners will be allotted twenty percent (20%) of the developed saleable lots and CDC will be designated eighty percent (80%) thereof. 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. 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 the Owners and CDC is not a corporation subject to corporate income tax. 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) acSECT The allocation of the developed saleable lots of the project between the Owners and CDC, in consideration of their respective contributions, as stipulated in their agreement 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 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 their parcel of land, the Owners, neither sell, barter, exchange goods, property nor render services to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001) The Deed of Partition whereby the Owners and CDC will allocate unto each other their shares in the subdivision lots in consideration of their respective contributions is not subject to the documentary stamp tax 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 saleable area between the parties, as the return of the capital which each has contributed. However, the acknowledgment to said Deed of Partition is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997, as amended. 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 Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001 or capital gains tax under Section 24 (D) (1), as the case may be. Moreover, such sale shall be subject to the documentary stamp tax 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. IcEACH 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 title to the parties based on their respective allocations pursuant to the Deed of Partition, without need of presentation of proof of payment of the creditable withholding tax, value-added tax and the corresponding documentary stamp tax. Provided, that the parties to the joint venture shall cause the Register of Deeds to annotate on the TCTs 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 developed/saleable lots in accordance with the allocation ratio in the JVA. For this purpose, a compliance report of the project indicating the number of lots developed, the respective TCTs 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