Mr. Nathaniel Canlas

February 13, 2009 BIR RULING [DA-(JV-008) 080-09] Sec. 22; Joint Venture Mr. Nathaniel Canlas San Miguel, Sindalan San Fernando City, Pampanga Sir : This refers to your letter requesting a ruling that the distribution or allocation to the co-venturers of their respective shares in the development project is exempted from the payment of income, capital gains and documentary stamp taxes imposed under Sections 24 (A), 24 (D) (1), 27 (A), 27 (D) (5) and 196, all of the Tax Code of 1997, as amended. EHaDIC It is represented that Magno T. Canlas, Jr., Ponce Gomez and Sons, Inc., Aronn Sigua Miranda and Evelyn P. Guevarra are the respective owners of parcels of land to be developed as a residential subdivision under the Joint Venture Agreement (JVA) they executed with the developer, Nathaniel Canlas , on February 4, 2009. The real properties to be developed into a residential subdivision to be named "Miguela Royale Subdivision", with the corresponding land areas, are as follows: TCT NO. Area (in sq.m.) Registered Owners 622446-R 64 Magno Canlas, Jr. 330942-R 1,284 Magno Canlas, Jr. 622447-R 64 Magno Canlas, Jr. 647212-R 64 Magno Canlas, Jr. 622449-R 189 Magno Canlas, Jr. 647213-R 64 Magno Canlas, Jr. 647217-R 64 Magno Canlas, Jr. 647218-R 64 Magno Canlas, Jr. 647219-R 64 Magno Canlas, Jr. 647220-R 1,406 Magno Canlas, Jr. 311169-R 158 Magno Canlas, Jr. 382803-R 345 Ponce Gomez and Sons, Inc. 382804-R 150 Ponce Gomez and Sons, Inc. 382805-R 150 Ponce Gomez and Sons, Inc. 382806-R 150 Ponce Gomez and Sons, Inc. 382807-R 150 Ponce Gomez and Sons, Inc. 382808-R 150 Ponce Gomez and Sons, Inc. 382740-R 150 Ponce Gomez and Sons, Inc. 382741-R 150 Ponce Gomez and Sons, Inc. 382742-R 150 Ponce Gomez and Sons, Inc. 382743-R 150 Ponce Gomez and Sons, Inc. 382744-R 150 Ponce Gomez and Sons, Inc. 382745-R 150 Ponce Gomez and Sons, Inc. 382747-R 104 Ponce Gomez and Sons, Inc. 382748-R 130 Ponce Gomez and Sons, Inc. 382749-R 120 Ponce Gomez and Sons, Inc. 382750-R 118 Ponce Gomez and Sons, Inc. 382751-R 119 Ponce Gomez and Sons, Inc. 330943-R 1,493 Magno Canlas, Jr. 622444-R 105 Magno Canlas, Jr. 382752-R 116 Ponce Gomez and Sons, Inc. 382753-R 118 Ponce Gomez and Sons, Inc. 382754-R 113 Ponce Gomez and Sons, Inc. 382755-R 111 Ponce Gomez and Sons, Inc. 382756-R 115 Ponce Gomez and Sons, Inc. 382757-R 107 Ponce Gomez and Sons, Inc. 382758-R 114 Ponce Gomez and Sons, Inc. 382759-R 105 Ponce Gomez and Sons, Inc. 382760-R 112 Ponce Gomez and Sons, Inc. 382761-R 103 Ponce Gomez and Sons, Inc. 382762-R 100 Ponce Gomez and Sons, Inc. 382763-R 88 Ponce Gomez and Sons, Inc. 382764-R 105 Ponce Gomez and Sons, Inc. 382765-R 105 Ponce Gomez and Sons, Inc. 382766-R 154 Ponce Gomez and Sons 382767-R 158 Ponce Gomez and Sons 342259-R 157 Evelyn P. Guevarra 673570-R 176 Aronn Sigua Miranda The total area available for development is 9,827 sq.m. The corresponding saleable lots per Joint Venture Agreement shall be distributed as follows: DaEcTC Nathaniel Canlas 50% Magno Canlas, Jr. 25% Ponce Gomez and Sons, Inc. 23% Evelyn P. Guevarra 1% Aronn Sigua Miranda 1% In support of your request, you submitted copies of the Transfer Certificates of Title (TCTs), Tax Declarations (TDs) and the Joint Venture Agreement executed by the parties. In reply, please be informed as follows: Section 22 (B) of the Tax Code of 1997, as amended, states as follows: "Section 22. Definitions . When used in this Title: xxx xxx xxx (B) The term 'corporation' shall include partnerships, 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. 'General professional partnerships' 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." (Underscoring supplied) The abovementioned exemption was initiated under Presidential Decree (P.D.) No. 929, dated May 4, 1976, which amended the definition of a "taxable" corporation in the Tax Code, as amended, to specifically exclude joint ventures formed for the purpose of undertaking construction projects. Said PD instituted the amendment of the definition of the term "taxable" corporation in recognition of the following situations: (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 local contractors to enter into joint ventures to pool, their limited resources in undertaking big construction projects. Hence, to assist the local contractors in achieving competitiveness with foreign contractors, the joint ventures formed by said local contractors were thus deemed as not falling under the definition of a "taxable" corporation, and thus not subject to income tax. This was, and still is, the intention of the legislature. Such being the case, the Joint Venture Agreement entered into by Nathaniel Canlas with the landowners, namely: Magno T. Canlas, Jr., Ponce Gomez and Sons, Inc., Aronn Sigua Miranda and Evelyn P. Guevarra, is not subject to the income tax imposed under Section 27 (A) of the Tax Code of 1997, as amended. CHcTIA Moreover, the allocation of the saleable lots between Nathaniel Canlas and the respective landowners, which is done effectively in consideration of their respective contributions, does not constitute a taxable event, as no income is actually realized by either the developer and/or the landowners. The partition or allocation will be made without consideration, and will not be in connection with any sale between the said parties. 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 developer and the landowners, having contributed to the development of the aforementioned real properties, will not realize any income upon the allocation of the saleable lots. Hence, the allocation of lots arising from the Joint Venture Agreement executed by the above parties is not subject to capital gains tax, income tax, and consequently, to withholding tax. The said allocation, likewise, is not subject to VAT. 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. However, by contributing the parcels of land, the landowners neither sells, barters, exchanges goods, property nor renders services to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001; BIR Ruling No. DA-115-2001 dated September 5, 2001). The developer and the landowners will only realize income upon their respective sales of the saleable lots allocated to each of them. In this regard, said sales to third parties, if ever undertaken by the developer and/or the landowners, would be subject to regular income tax in accordance with Sections 24 (A) and 27 (A) of the 1997 Tax Code, as amended, and consequently to withholding tax as implemented under Revenue Regulations (RR) No. 2-98, as amended. The said sales by the developer and/or the landowners to third parties would likewise be subject to the VAT at the rate of 12%, in accordance with Sections 106 and 109 of the 1997 Tax Code, as amended, and to the Documentary Stamp Tax (DST) at the rate fifteen pesos (P15.00) for each one thousand pesos (P1,000.00), or fractional part thereof in excess of one thousand pesos (P1,000.00) of such consideration or value, in accordance with Section 196 of the 1997 Tax Code, as amended. Further, the Partition Agreement that will be executed by the developer with the respective landowners, whereby the developer and the landowners allocate unto each other their corresponding shares in the saleable lots in consideration of their respective contributions, are not subject to the DST imposed under Section 196 of the 1997 Tax Code, as amended, considering that, as stated earlier, 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 Partition Agreement will be executed without consideration and not in connection with a sale between Nathaniel Canlas and the respective landowners, no DST therefore is due and collectible on said Partition Agreement. However, the notarial acknowledgment to said Partition Agreement shall be subject to the DST pursuant to Section 188 of the 1997 Tax Code, as amended, in the amount of P15.00. HSTaEC In connection with the above development project, the Joint Venture created and the co-venturers are hereby required to register with the Revenue District Office (RDO) where their principal place of business is located. Moreover, this ruling authorizes the Revenue District Officer of the revenue district where the properties are located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the transfer of the titles to the lots to be received by the developer and the landowners based on their respective allocations pursuant to the partition without need of presentation of proof of payment of the capital gains tax or the creditable Withholding Tax, Documentary Stamp Tax and Value-Added Tax and/or Donor's Tax. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service