SGV & Co.

April 16, 2010 BIR RULING [DA-(JV-013) 049-10] Sec. 22 (B); DA-373-08; DA-356-08; DA-319-08; DA-196-08; DA-455-07 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. M.F. A. Balili Partner Gentlemen : This refers to your letter dated April 2, 2009 requesting on behalf of your client, Federal Land Orix Corporation ("FLOC"), for a confirmation on the tax consequences of its joint venture agreement with Metropolitan Bank & Trust Company ("MBTC") for the development of a condominium project known as the "The Grand Midori Makati" (the "Project"). The facts as represented are as follows: FLOC is a real estate developer for residential, commercial and mixed-use property developments in Metro Manila. MBTC, on the other hand, is the absolute and registered owner of four (4) parcels of land located at 160 Legaspi Street, Legaspi Village, Makati City, with an aggregate area of Three Thousand Two Hundred and Eighty Two (3,282) square meters, more or less, covered by Transfer Certificates of Title (TCT) Nos. 148694, 148695, 148696 and 148697 issued by the Register of Deeds for the City of Makati. On April 15, 2008, a Joint Venture Agreement (JVA) was executed by and between FLOC and MBTC for the construction and development of "The Grand Midori Makati", a multi-storey residential and commercial condominium project composed of two (2) towers. TIcAaH Under the JVA, MBTC, as landowner, shall contribute the parcels of land and FLOC, as 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 a return on, the respective contributions of the parties, specifically designated condominium units and parking slots in the Project will be allocated in separate ownership between the parties. For purposes of expediting and facilitating the marketing and sale of the condominium units and parking slots specifically allocated to MBTC, the Condominium Certificates of Title (CCT) for the MBTC shall be issued in the name of FLOC but only as Trustee for MBTC. Thus, the CCTs for MBTC's units as Landowner's shares shall be issued in the name of "FEDERAL LAND ORIX CORPORATION as Trustee and in Trust for METROPOLITAN BANK & TRUST COMPANY". Notwithstanding such fact, FLOC explicitly acknowledges MBTC's legal right to and ownership over such properties. While the CCTs covering the condominium units and parking slots allocated for FLOC, as Developer's share, and those covering the open spaces and common areas of the Project for subsequent transfer to the Condominium Corporation, will be issued in the name of FLOC. Based on the foregoing representations, you now request for confirmation of your opinion that: (1) The April 15, 2008 JVA between FLOC and MBTC 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 MBTC in the form of real properties is not subject to income tax, creditable withholding tax (CWT), and value-added tax (VAT) 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 condominium units and parking slots between FLOC and MBTC in consideration of 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 agreement in the JVA that the CCTs for MBTC's units and parking slots as Landowner's Share in the Project will be issued in the name of "FLOC as Trustee and in Trust for MBTC" is not a taxable event and is not subject to income tax, CWT, VAT and DST, because it is not a sale and there is no transfer of title from MBTC to FLOC; (5) The transfer of the title to the land and common areas to the Condominium Corporation from the Developer is not subject to income tax, CWT, VAT and DST under Section 196 of the Tax Code since the transfer is made without monetary consideration; and (6) The subsequent disposition by the parties under the JVA of the residential and commercial units and parking slots 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 that this Office hereby confirms your opinion as follows: (1) The unincorporated joint venture arising from the April 15, 2008 JVA between FLOC and MBTC for the development and construction of the Project, and the allocation of their respective shares in the units and parking slots in the Project, will not give rise to a taxable joint venture separate and distinct from the parties, within the meaning of Section 22 (B), in relation to Section 27 (A) of the Tax Code. HEDSCc The elements that would characterize a taxable joint venture are as follows (BIR Ruling No. DA-455-07 dated August 17, 2007): 1. That each party to the venture must make a contribution, not necessarily of capital, but by way of services, skill, knowledge, material or money; 2. Profits must be shared among the parties; 3. There must be a joint proprietary and right of mutual control over the subject matter of the enterprise; 4. Usually, there is a single business transaction; and 5. An unmistakable intention to form that partnership or joint venture. However, Section 22 (B) of the Tax Code provides: "(B) The term corporation shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts ( cuentas en participation ), 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 operation or consortium agreement under a service contract with the government. . . . ." Thus, in BIR Ruling No. DA-356-08 dated June 11, 2008, this Office ruled that the joint venture between Ayala Land, Inc. ("ALI") and Montecito Properties, Inc. ("MPI") for the joint redevelopment of a residential subdivision known as the Montecito Estates with MPI as the landowner and ALI as the developer is not a taxable joint venture. This Office held that: "Considering therefore, that it is the intention of the legislature to exclude joint venture or consortium formed for the purpose of undertaking construction projects from the definition of taxable corporation, this Office hereby opines that the joint venture by and between MPI and ALI is not subject to income tax under Section 27 of the Tax Code of 1997, as amended." Based on the JVA between FLOC and MBTC, no profits will be shared by the parties because once the development and construction of the Project is completed, each party will take separate ownership of specifically-identified units and parking slots in the Project based on their contributions to the Project. Each party will then be free to sell its share of the units and parking slots to third parties. Hence, the parties shall be separately subject to the applicable income tax on their taxable income during each taxable year respectively derived by them from their sales of their share in the Project. (BIR Ruling DA-196-08 dated March 25, 2008) Accordingly, the unincorporated joint venture formed pursuant to the JVA between FLOC and MBTC is excluded from the definition of taxable corporations under Section 27 (A) of the Tax Code and is, consequently, not subject to corporate income tax. However, FLOC and MBTC are separately subject to the applicable income tax on their taxable income during each taxable year respectively derived by them from their sales of their share in the Project. The JVA executed by and between FLOC and MBTC is neither a contract of sale over real property nor an instrument which convey title to real property. Hence, no income tax or DST is due upon the execution of the JVA according to Section 186 of Revenue Regulations No. 26. However, the notarial acknowledgment on the JVA is subject to the DST on certification pursuant to Section 188 of the 1997 Tax Code, as amended. (BIR Ruling No. DA-221-08 dated April 9, 2008 and BIR Ruling No. DA-194-06 dated March 28, 2006) AIDcTE (2) MBTC's contribution of parcels of land to the Project is not subject to income tax, CWT and VAT since it does not constitute a sale of property in the course of trade or business, but is a capital contribution to the Projects which is not a taxable event. In BIR Ruling No. DA-319-08 dated May 27, 2008, this Office held: "ALI did not convey or transfer its ownership or interest over its parcels of land when it contributed the same to the joint venture but merely pooled its resources to a common fund, along with that of ONE DELA ROSA for the purpose of undertaking the construction and development of the Project. These pooled resources are co-owned by the joint venture partners. The contribution of land by ALI, as well as that of ONE DELA ROSA of undertaking the construction and development of the Project, constituted its capital contributions to the joint venture project, therefore, such contribution is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax. The transfer is also not subject to VAT since the transfer is not in the course of business but a capital contribution." (3) The partition/allocation of condominium units and parking slots between FLOC and MBTC in consideration of their respective contributions is not a taxable event and is not subject to income tax, CWT, VAT and DST, because it is a mere return of capital that each has contributed to the Project. Section 36 of Revenue Regulations No. 2, otherwise known as the Income Tax Regulations, explicitly provides: "Income, in the broad sense, meaning all wealth which flows into the taxpayer other than as a mere return of capital. It includes the forms of income specifically described as gains or profits, including gains derived from the sale or other disposition of assets." Being a mere return of the capital that each party contributed to the Projects, the allocation of each party's share in the units and parking slots in the Projects does not yet result in the realization of gain. In BIR Ruling No. DA-319-08 dated May 27, 2008, it was ruled that the allocation and distribution of the respective shares of the Developer and Landowner in the Project in accordance with the JDA in consideration for their respective contributions under the said agreement is not a taxable event and is not subject to income tax, CWT, VAT and DST because the allocation is a mere return of capital that each has contributed. Moreover, the Deed of Partition to be executed to evidence the allocation and distribution and the issuance of the Condominium Certificates of Title, being without monetary consideration, is not subject to VAT, income tax, CWT and DST. However, the notarial acknowledgment to the Deed of Partition is subject to DST of Php15.00 pursuant to Section 188 of the Tax Code. (4) The agreement in the JVA that the CCTs for MBTC's units and parking slots as Landowner's Share in the Project will be issued in the name of FLOC as Trustee and in Trust for MBTC is not a taxable event and is not subject to income tax, CWT, VAT and DST, because it is not a sale and there is no transfer of title from MBTC to FLOC, but is intended to expedite and facilitate the marketing, sale and disposition of the units in the Project. In a similar ruling (BIR Ruling No. DA-196-08 dated March 25, 2008 citing BIR Ruling No. DA-013-05 dated January 19, 2005), we ruled that: "The agreement in the July 9, 2007 Supplement to MOA that the CCTs for HCAI's units and parking slots as Landowner's Share in Cluster C of the Marquinton Project will be issued in the name of FLI as Trustee and in Trust for HCAI is not a taxable event and is not subject to income tax, CWT, VAT and DST, because it is not a sale and there is no transfer of title from HCAI to FLI, but is intended to expedite and facilitate the marketing, sale and disposition of the units in Cluster C. aIAcCH Despite the fact that the CCTs for HCAI's share in the floors and parking slots in Cluster C will be issued in the name of FLI as Trustee and in Trust for HCAI, HCAI will maintain separate and legal ownership of its units and parking slots and, accordingly, all income and expenses related to the sale of its units/parking slots shall accrue to, and be for its account, and all taxes related thereto shall be payable and reportable by HCAI." Further, by virtue of Section 2.3, Article II of the JDA, FLI undertakes to market the saleable lots allocated to MBTC, the marketing fees, if any, derived by FLI thereof shall be subject to income tax imposed under Section 27 (A) of the Tax Code of 1997, as amended, and consequently, to the withholding tax imposed under Revenue Regulations No. 2-98, as amended, and to the VAT imposed under Section 108 of the same Tax Code. (5) The transfer of the titles to the land and common areas to the Condominium Corporation from the Developer is not subject to income tax, CWT, VAT and DST under Section 196 of the Tax Code since the transfer is made without monetary consideration. Pursuant to BIR Ruling Nos. DA-319-08 dated May 27, 2008 and DA-194-06 dated March 28, 2006, the conveyance of the land and common areas of the Project to the condominium corporation for the purpose of holding title to such land and common areas and for such other purposes as may be necessary for the administration and management of the same pursuant to the Condominium Law is without monetary consideration and not in connection with a sale. Hence, there is no gain, presumed or actual, to be realized from the transfer. Thus, it is not subject to income tax, CWT, VAT and DST, except that the notarial acknowledgment to the Deed of Conveyance is subject to the DST of P15 pursuant to Section 188 of the Tax Code. (6) The subsequent disposition by the parties of the units and parking slots allocated to them shall be subject to income tax, CWT, VAT and DST under Section 196 of the Tax Code based on their respective income, cost basis and expenses in the Project. This Office pronounced in several rulings that the subsequent disposition by the parties under the Joint Venture Agreements of the individual/subdivided lots allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax rate provided under Section 27 (A) of the 1997 Tax Code, capital gains tax imposed under Section 24 (D) of the same Code, and to the CWT under Revenue Regulations No. 2-98, as last amended by RR No. 30-2003. Moreover, said sale shall be subject to the DST imposed under Section 196 of the 1997 Tax Code based on the gross selling price or fair market value of the properties which ever is higher. Furthermore, the said sale shall likewise be subject to VAT, as implemented by R.R. No. 16-2005, as amended by R.R. 4-2007. (BIR Ruling Nos. DA-(JV-023) 178-08 dated August 28, 2008, DA-373-08 dated June 19, 2008, DA-356-08 dated June 11, 2008, DA-221-08 dated April 9, 2008, DA-556-07 dated October 24, 2007) TIaEDC 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 CWT, VAT and the corresponding DST. 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 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 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 ration 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. 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.) GREGORIO V. CABANTAC Deputy Commissioner