Puno and Puno Law Offices

April 16, 2010 BIR RULING [DA-(JV-012) 048-10] 22 (B); BIR Ruling 002-97; DA-247-01; DA-067-02; DA-262-01; DA-373-08; DA (JV-001)002-10 Puno and Puno Law Offices 12th Floor, East Tower Philippine Stock Exchange Centre Exchange Road, Ortigas Center City of Pasig, Philippines 1605 Attention: Attys. Ma. Elizabeth Peralta E. Loriega Dionne Marie M. Sanchez Gentlemen : This refers to your letter dated February 11, 2010 requesting on behalf of your client, Federal Land, Inc. ("FLI"), confirmation of your opinion that the Joint Development Agreement ("JDA") entered into by FLI and the Metropolitan Bank and Trust Corporation ("Metrobank") on September 8, 2008 for the purpose of developing a real estate property within the Bonifacio Global City (the "Project"), gave rise to an unincorporated joint venture ("UJV"), which is not a separate taxable entity within the meaning of Section 22 (B) in relation to Section 27 (A) of the National Internal Revenue Code of 1997, as amended (the "Tax Code"). The facts, as represented, are as follows: FLI is a corporation duly organized under the laws of the Philippines, with principal office address at 16th Floor, GT Tower International, Ayala Avenue corner H. V. Dela Costa Street, Makati City. FLI is a real estate developer of various residential, commercial and mixed-use property developments such as Bay Garden in the reclamation area in Roxas Boulevard and Oriental Garden in Makati City. Metrobank, on the other hand, is a banking corporation duly organized under the laws of the Philippines, and licensed by the Bangko Sentral ng Pilipinas ("BSP"),with principal office address at the Metrobank Plaza Building, Senator Gil J. Puyat Ave.,Makati City. FLI and Metrobank entered into the JDA on September 8, 2008 in order to undertake the Project, the development of a real estate property, consisting of twenty seven (27) parcels of land within Bonifacio Global City, into a multi-phased project composed of commercial, residential, and retail elements. Under the JDA, Metrobank as the Landowner shall contribute undeveloped land obtained through foreclosure to the UJV, while FLI is the Developer shall provide the necessary expertise and resources for the construction and development of the Project and perform all the development work. In consideration of, and as a return of the capital contributed by the parties, developed lots in the Project shall be allocated in separate legal ownership between Metrobank and FLI in an 80%-20% sharing ratio, based on the proportion that their respective contributions bear to the Project. In addition, all developed open spaces, common areas, and road lots of the Project, which are carried at zero value, shall be allocated to FLI, such that FLI shall have as a total return of capital, 20% of the developed saleable lots plus all developed open spaces, common areas, and road lots. This is consistent with the Supplement to the JDA dated February 9, 2010, through which title to all open spaces, common areas and road lots of the Project were transferred to FLI as the Developer. aDHCcE On the basis of the foregoing, you request for confirmation that: 1. The JDA and the Supplement to the JDA between FLI and Metrobank will not give rise to a taxable joint venture as provided under Section 22 (B), in relation to Section 27 (A) of the Tax Code. 2. The contribution of Metrobank in the form of real property is not subject to income tax, CWT, and VAT under Section 106 of the Tax Code since it does not constitute a sale of property in the course of trade or business but is a capital contribution to the Project. 3. The partition/allocation of saleable and developed lots, including all developed open spaces, common areas, and road lots, between FLI and Metrobank as consideration for their respective contributions is not a taxable event and is not subject to income tax, CWT, VAT, and documentary stamp tax ("DST") because it is a mere return of capital that each has contributed to the Project. 4. The subsequent disposition by the parties under the JDA of the developed lots allocated to them shall be subject to income tax, CWT, VAT and DST under Section 196 of the Tax Code. In reply, please be informed of the following: 1. The JDA executed by FLI, as DEVELOPER, and Metrobank, as LANDOWNER, described above is an agreement between the parties to provide land and fund the cost of construction and development of a multi-phased project composed of commercial, residential, and retail elements, and is neither a contract of sale over real property nor an instrument which conveys title to real property. Hence, no income tax or documentary stamp tax (DST) is due upon the execution of the JDA. (Section 186 of Revenue Regulations No. 26). However, the notarial acknowledgment on the JDA is subject to the DST on certification pursuant to Section 188 of the 1997 Tax Code. (BIR Ruling No. DA-067-02 citing BIR Ruling No. DA-247-2001 dated November 27, 2001) Section 22 (B) of the 1997 Tax Code, provides: "(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 partnership' 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." From the foregoing definition of a corporation, we confirm your opinion that the JDA executed between the parties does not give rise to a taxable Joint Venture. The parties to a Joint Venture agreement may file separate income tax returns for their net revenue for the above-mentioned project less their respective proportionate share in the Joint Venture expenses since the Joint Venture is not embraced within the meaning of the term "corporation", hence, not subject to the corporate income tax imposed under Section 27 (A) of the 1997 Tax Code. (BIR Ruling No. DA-067-02 citing BIR Ruling No. 002-97 dated January 14, 1997) ISAaTH 2. The contribution of the LANDOWNER to the Joint Venture in the form of real property is not subject to income tax and value-added tax imposed under Sections 27 (A) and 105 of the 1997 Tax Code, respectively. The LANDOWNER did not convey or transfer its ownership or interest over the PROPERTY when it contributed the PROPERTY to the Joint Venture but merely pooled the PROPERTY into a common fund together with the DEVELOPER. The conveyance of parcels of land by the LANDOWNER is but its capital contribution to the Joint Venture and therefore, not a taxable event that will give rise to the payment of regular income tax and creditable withholding tax. (BIR Ruling DA-067-02 citing BIR Ruling Nos. DA-247-2001; DA-262-2001) The contribution of the PROPERTY by the LANDOWNER to the Joint Venture is likewise not subject to VAT. 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 the VAT imposed in Sections 106 to 108 of the same Tax Code. But by contributing the PROPERTY as capital, the LANDOWNER does not sell, barter, exchange, lease nor import goods or properties, nor render services, and therefore the contribution of the PROPERTY by the LANDOWNER to the Joint Venture is not a transaction subject to VAT. (BIR Ruling DA-067-02 citing BIR Ruling No. DA-262-2001) 3. The allocation and distribution of the saleable and developed lots, including all developed open spaces, common areas, and road lots, between the LANDOWNER and the DEVELOPER, respectively, in consideration of their respective equity contributions and in accordance with the allocation percentages as stipulated in the JDA, is not subject to income tax, withholding tax, documentary stamp tax and VAT since the aforesaid allocation and distribution constitute a mere return of the capital contributed by them to the Joint Venture. (BIR Ruling Nos. DA-067-02; DA-015-02) The allocation and distribution of saleable and developed lots between the Joint Venture partners partakes of the nature of dissolution of co-ownership over real property, and merely identifies which lots pertain to each of the co-venturers. The eventual issuance of Transfer Certificates of Title (TCTs) in their respective individual names is therefore a mere formality of such dissolution, and is not a taxable event. Hence, the titling of 80% of the saleable and developed lots in favor of the LANDOWNER and the titling of 20% of the saleable and developed lots, including all developed open spaces, common areas and road lots, in the name of the DEVELOPER, as stipulated in the JDA, is not subject to income tax, expanded withholding tax and VAT. The taxable event will rise when the Joint Venture partners start selling their duly received developed lots/units to third parties. (BIR Ruling No. DA-140-00 citing BIR Ruling No. 010-96 dated January 23, 1996) aScIAC 4. The subsequent sale to third parties by the co-venturers of the saleable and developed lots allocated to each of them is subject to the regular taxes under the Tax Code. Thus, the gain that may be realized by either co-venturer from such sale or disposition will be subject to the regular income tax rate provided under Section 27 (A) of the 1997 Tax Code and to the creditable withholding tax under Revenue Regulations No. 2-98, as amended. Moreover, said sale or disposition shall be subject to the documentary stamp tax imposed under Section 196 of the 1997 Tax Code 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 pursuant to Section 105 of the same Tax Code. (BIR Ruling Nos. DA-067-02 and DA-015-02) 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 JDA, without need of the presentation of proof of payment of the expanded withholding tax, VAT 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 joint venture between the parties, and that the aforestated 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 lots in accordance with the allocation ratio in the JDA. For this purpose, a compliance report of the project indicating the number of lots developed/built, the respective TCTs and the party in whose name the corresponding title was issued. (BIR Ruling No. DA-373-2008 dated June 19, 2008) CAIaDT 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, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group