Macam Raro Ulep & Partners

February 11, 2009 BIR RULING [DA-(JV-008) 077-09] Section 22 (B); DA(JV-016)132-2008 dtd. 8/12/08 Macam Raro Ulep & Partners Unit 1008, 10/F Atlanta Center, Annapolis St., Greenhills, San Juan Metro Manila Attention: Augusto M. Macam Gentlemen : This refers to your letter dated December 23, 2008, requesting confirmation of your opinion on the following, to wit: ICTHDE The joint-venture whereby OWNERS will contribute the project area and the TRUSTEES-DEVELOPERS will finance the entire project does not give rise to a taxable joint-venture, hence, is not subject to corporate income tax, pursuant to Section 22 (B), in relation to Section (A) of the Tax Code. The allocation and distribution of finished units in the Project in consideration for their respective contributions to the venture is not a taxable event, and hence is not subject to the regular corporate income tax nor to creditable withholding tax under Revenue Regulations No. 2-98, nor the value added tax under Section 106 nor to the documentary stamp tax under Section 196, both of the Tax Code, because the allocation is a mere return of capital that each of the parties have contributed to the Project. The Deed of Partition to be executed by the parties whereby they allocate and distribute among themselves their respective shares in the Project in exchange for their respective contributions is without monetary considerations, and hence, are not subject to value-added tax under Sec. 106 of the Tax Code, income/creditable withholding tax under Sec. 106 of the Tax Code, income/creditable withholding tax under RR No. 2-98 and documentary stamp tax under Section 196 of the Tax Code. Consequently, the confirmation of this request will authorize the Revenue District Officer (RDO) concerned to issued the corresponding Tax Clearance Certificate with regard to the transfer of the titles to the units to be received by each of the parties based on their respective allocations pursuant to the Deed of Partition without need of presentation of payment of the creditable withholding tax, documentary stamp tax and value-added tax. It is represented that Prime Boracay Developers Inc., a domestic corporation in their capacity as trustees for and in behalf of the Realty Company, represented by its directors Romulo Gabionza and Betty Gabionza, herein referred to as trustees-developers entered into a Joint Venture Agreement (JVA) with the land owners, Sps. Bartolome and Froletiza Bautista, for the development of a parcel of land consisting of 1,837 square meters located at Balabag, Malay, Aklan, into a residential-commercial condominium hotel building embodying modern and highly efficient and functional features and facilities; that the project includes the master planning of the intended development of the project, the design and construction of the buildings, the open spaces, amenities and facilities in the project area and the marketing and sale of the finished residential/commercial units in the project; that in consideration of and return for their investments, the equivalent capital contribution/interest of the project shall be divided and distributed on a 30-70 sharing arrangement in favor of the trustees-developers; that the specific terms of the Agreement are as follows: ScAIaT (a) The OWNERS shall contribute all their right, title and interest over the land to the project (The Property); (b) The TRUSTEES-DEVELOPERS shall provide the necessary financing for the construction and development of the Project and shall be responsible for causing, financing, overseeing and coordinating the performance of the necessary work for the implementation of the Project; (c) In consideration of and in return for their investments, the equivalent capital contribution/interest of the parties shall be divided and distributed in the following proportion: i. To the OWNERS 30% ii. To the TRUSTEES-DEVELOPERS 70% (d) The actual distribution to the parties of their respective allocated units shall be effected through a Deed of Partition for which the parties will execute without monetary consideration; (e) After distribution of the developed units, the parties shall maintain separate ownership of their respective shares and may sell them to third parties. In reply, please be informed as follows: Pursuant to Section 22 (B) of the NIRC, as amended, 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 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. aIAcCH Considering the clear provision of Section 22 (B) which clearly 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, the joint venture of The Realty Company/Prime Boracay (the trustees-developers) and Sps. Bartolome & Froletiza Bautista (the Landowners), is not a corporation subject to corporate income tax. However, for VAT purpose, the joint venture (or consortium) is by itself a taxable entity. Moreover, the contribution of each of the parties to the joint venture is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax since the parties did not convey or transfer any ownership or interest when they contributed to the joint venture but merely pooled their resources to a common fund. The said contributions constitute their capital contribution to the joint venture project. The transfer is also not subject to value-added tax (VAT), since the transfers are not in the course of business but capital contributions. In view of the above, there will be no taxes involved in the event that Sps. Bartolome & Froletiza Bautista transfers and assigns to The Realty Company/Prime Boracay seventy percent (70%) of the resultant subdivided lots in return for the latter's cost of development. The allocation of saleable lots of the Project between The Realty Company/Prime Boracay and Sps. Bartolome & Froletiza Bautista , in consideration of their respective contributions 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 party has contributed. The Memorandum of Sharing whereby The Realty Company/Prime Boracay and Sps. Bartolome & Froletiza Bautista will allocate unto each other their share in the saleable area in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 of the NIRC, 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 contributed. However, the acknowledgment to said Memorandum of Sharing is subject to the documentary stamp tax pursuant to Section 188 of the NIRC, as amended. Thus, inasmuch as there is no monetary consideration but a mere return of capital, the eventual execution and registration of the Memorandum of Sharing of subdivided lot is not subject to capital gains and documentary stamp taxes. DEHaTC However, upon the 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 regular income tax rate under Section 27 (A) of the NIRC, as amended and to the creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR 6-2001. Moreover, said sale shall be subject to the documentary stamp tax imposed under Section 196 of the NIRC, as amended based on the gross selling price or fair market value of the properties whichever is higher. Likewise, the said sale shall be subject to VAT. 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. This will authorized the Revenue District Officer (RDO) of the revenue district where the properties are 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 deed of Partition, without need of the 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 Transfer Certificate/s of Title 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 the 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/units in accordance with the allocation ratio in the Joint Venture Agreement, For this purpose, a compliance report of the project indicating the number of lots/units developed/built, respective TCTs/CCTs and the party in whose name the corresponding title was issued. (BIR Ruling No. 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 disclosed that the facts are different, then this ruling shall be considered null and void. CTHDcE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner