DMC Urban Property Developers, Inc.

July 15, 2008 BIR RULING [DA-(JV-012) 044-08] 22 (B); DA-373-2008; DA-126-2001 DMC Urban Property Developers, Inc. 2/F, 2281 Chino Roces Ave. Makati City Attention: Mr. Joy B. Fajardo Accounting Officer Gentlemen : This refers to your letter dated June 26, 2008 requesting for a confirmation of opinion: a) that the joint venture between Lalawigan Samal Real Estate Corporation (LSREC) and DMC Urban Property Developers, Inc. (UPDI) for the construction and development of a residential subdivision project will not create a taxable joint venture within the meaning of Section 22 (B) in relation to Section 27 (A) of the Tax Code of 1997; b) that the issuance of the corresponding Transfer Certificates of Title (TCT) by the Registry of Deeds for the Province of Bataan to LSREC and UPDI, representing their respective interest in the said project as stipulated in the Joint Venture Agreement (JVA) are not taxable events, therefore not subject to income and/or expanded withholding tax; c) that it is upon the sale or disposition to third parties of the saleable lots allocated that the gain realized by the parties in the said transaction will be subject to the regular income tax under Section 27 (A) of the Tax Code of 1997 and to the expanded withholding tax under Revenue Regulations (RR) No. 6-85, as amended by RR 2-98; and EScIAa d) that the joint venture is exempt from the payment of documentary stamp tax and value-added tax. Documents submitted show that LSREC is a corporation duly organized and existing under the laws of the Philippines and is the registered owner of a parcel of land with an aggregate land area of thirty three thousand four hundred fifty one square meters (33,451 sq.m.), more or less, as evidenced by Transfer Certificate of Title (TCT) No. T-229824 of the Registry of Deeds for the Province of Bataan. On the other hand, UPDI, is likewise a domestic corporation organized under Philippine laws and is engaged in property development and construction business. As stipulated in the JVA dated June 6, 2008 entered into by and between LSREC and UPDI as landowner and developer, respectively, the former shall contribute the above parcel of land, while the latter shall finance and infuse development expertise for the construction and development of the subdivision project to be known as Villa Esperanza II Subdivision (the "Project"). As a return of their respective contributions to the Project, the saleable lots in the Project shall be allocated to UPDI and LSREC on 70%-30% basis, correspondingly, as evidenced by the subsequent execution of a Deed of Partition dated June 06, 2008. 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. aIAHcE 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 LSREC and UPDI 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) The allocation of the saleable lots in the Project between LSREC and UPDI, 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 service and any person who imports goods shall be subject to VAT imposed in Sections 106 to 108 of the same Tax Code, as amended. Hence, by contributing its parcels of land, LSREC, neither sells, barters, exchanges goods, property nor renders service to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001) The Deed of Partition whereby LSREC and UPDI will allocate unto each other their shares 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 areas 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 expanded withholding tax under RR No. 2-98, as amended by RR No. 6-2001 or capital gains tax under Section 27 (D) (5), 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. SCHIac This will authorize 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 expanded 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 TCT that a development project is being undertaken on the land and is the object of the JVA 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 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