Atty. Miriam Gonzaga-Daway

February 17, 2009 BIR RULING [DA-(JV-012) 087-09] Section 22 (B); DA (JV-040) 381-2008 dtd. 11/03/08 Atty. Miriam Gonzaga-Daway Attorney-at-Law Unit 1505 OMM Bldg., San Miguel Ave. Ortigas Center, Pasig City Madam : This refers to your letter dated January 19, 2009 in behalf of your client, LANDCO PACIFIC CORPORATION, requesting a clarificatory ruling on the following to wit: What would be the taxes involved when the parties agree to a sharing of resultant subdivided lots, wherein LANDCO PACIFIC CORPORATION, shall receive 60% of the total subdivided lots being the developer. The landowner, shall retain 40% of the resultant subdivided lots as its share in the project; Would there be capital gains and documentary stamps (and if there is, how much) when the parties eventually execute and register the Memorandum of Sharing of Subdivided lots for the transfer of titles covering the developer's share in the project; What would be the taxes involved when the parties eventually sell their respective share of saleable lots to third parties? It is represented that your client, LANDCO PACIFIC CORPORATION (LANDCO, for short) with TIN-002-416-658-000 is the developer of Waterwood Subdivision situated in Baliuag, Bulacan; that with its intent to expand, LANDCO entered into a Joint Venture Agreement with ALEXCY CORPORATION with TIN-001-988-707, covering two (2) properties, to wit: Joint Venture Agreement with ALEXCY CORPORATION, covering Lot 2849 with an area of 30.014 sq.m. under TCT No. RT-7257 (1518806) with an agreed sharing of individual/developed subdivision lots wherein 60% shall belong to the Developer, LANDCO, and 40%, shall belong to the landowner, ALEXCY CORPORATION; Joint Venture Agreement with ALEXCY CORPORATION covering Lot 3-C with an area of 12,758 sq.m. under TCT No. T-1290 EP, with an agreed sharing of individual/developed subdivision lots wherein 60% shall belong to the Developer, LANDCO, and 40% shall belong to the Landowner, ALEXCY CORPORATION. that in all the said joint venture agreements, it was stated that LANDCO shall provide the expertise and manpower and shall assume all expenses in the planning and construction/development of the subdivision and in return, the parties agree to share in the resultant subdivided/developed lots, on a 60-40 sharing arrangement, in favor of LANDCO, the Developer; that pursuant to the above joint venture agreement, and in accordance with the master plan, LANDCO (the Developer) and ALEXCY CORPORATION (the Landowner) executed a Memorandum of Sharing, which reflects their sharing of resultant individual/developed subdivision lots under a 60-40 sharing agreement, in favor of the Developer; and that you would like to request for an opinion/ruling on the tax consequences of the above-stated transactions. 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. 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 LANDCO (the Developer) and ALEXCY CORPORATION (the Landowner), 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 transfers are 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 ALEXCY CORPORATION transfers and assigns to LANDCO sixty percent (60%) of the resultant subdivided lots in return for the latter's cost of development. The allocation of saleable lots of the Project between LANDCO and ALEXCY CORPORATION 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. aADSIc The Memorandum of Sharing whereby LANDCO and ALEXCY CORPORATION 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. 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. aTAEHc 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) ESIcaC 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