Landco Pacific Corporation

July 10, 2008 BIR RULING [DA-(JV-009) 025-08] Sec. 22 Joint Venture Landco Pacific Corporation 3/F, Centermall Building, # 51 President Avenue BF Homes, Paraaque City Attention: Mr. Alfred Xerez-Burgos, Jr. & Mr. Francis V. Ceballos Gentlemen : This refers to your letter dated June 6, 2008 requesting, in effect, for 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 27 (A), 27 (D) (5) and 196, respectively, all of the Tax Code of 1997, as amended. It is represented that Central Weyland Properties, Inc. ("CWPI" for brevity), the registered owner of two (2) parcels of land, both located in Brgy. Del Carmen, San Fernando, Pampanga, covered by Transfer Certificate of Title (TCT) Nos. 677818-R and 677843-R, with land areas of 482,312 sq.m. and 3,576 sq.m., respectively. CWPI has signified its intention to develop its properties to their highest and best use. cACDaH Landco Pacific Corporation ("LPC" for brevity), on the other hand, has the managerial expertise, experience, organization and financial resources to develop real estate properties to their highest and best use, yielding optimal profits, ensuring value appreciation over time, and has expressed willingness to act as the developer of the properties of CWPI. As a result, CWPI and LPC agreed to enter into a contractual and unincorporated Joint Venture (JV) to undertake the aforesaid development project and executed a Joint Venture Agreement (JVA) on May 21, 2008 to define their relationship vis-a-vis each other and their rights and obligations in connection with the development of the subject properties. CWPI agreed to share with LPC on a sixty-forty percent (60-40%) ratio [60% for LPC and 40% for CWPI], of all the individual lots after the completion of the subdivision/development project. LPC and CWPI will execute a Memorandum of Sharing to implement such partition agreement. Moreover, CWPI and LPC executed a Marketing and Selling Agency Agreement wherein CWPI appointed LPC as its agent or any of its affiliates or assigns, as the exclusive marketing and sales organization for the purpose of disposing its 40% shares in the individual saleable lots. For and in consideration of the services to be performed by LPC to CWPI, LPC shall be entitled to commissions and fees equivalent to fourteen percent (14%) of the gross proceeds from the sales of the individual lots net of value-added tax (VAT) due on such gross proceeds. The marketing fee shall be inclusive of the VAT and expanded creditable withholding tax (CWT) due on the marketing fee. LPC shall issue a VAT-registered Official Receipt to CWPI for the marketing fee, net of the CWT. In support of your request, you submitted copies of the Transfer Certificates of Title (TCTs), Tax Declarations (TDs), Joint Venture Agreement and Marketing and Selling Agency Agreement executed with CWPI. 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." (Emphasis supplied) aSCHcA 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 P.D. 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 LPC and CWPI is not subject to the income tax imposed under Section 27 (A) of the Tax Code of 1997, as amended. Moreover, the allocation of the individual saleable lots between LPC and CWPI, 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 landowner. 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 landowner, 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 landowner 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 landowner will only realize income upon their respective sales of the individual saleable lots allocated to each of them. In this regard, said sales to third parties, if ever undertaken by the developer and/or the landowner, would be subject to regular income tax at the rate of 35%, in accordance with Section 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 landowner 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. ITSCED Further, the Memorandum of Sharing (partition agreement) that will be executed by the developer with the landowner, whereby the developer and the landowner allocate unto each other their corresponding shares in the saleable lots in consideration of their respective contributions, is 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 Memorandum of Sharing will be executed without consideration and not in connection with a sale between LPC and CWPI, no DST therefore is due and collectible on said Memorandum of Sharing. However, the notarial acknowledgment to said Memorandum of Sharing shall be subject to the DST pursuant to Section 188 of the 1997 Tax Code, as amended, in the amount of P15.00. On the other hand, LPC shall be subject to VAT and CWT on the commissions and fees it received from CWPI for marketing and selling the 40% individual saleable lots allocated to the latter. Finally, in connection with the above development project, the Joint Venture 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. HETDAa Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service