Noble Built Construction &

April 23, 2010 BIR RULING [DA-(JV-014) 053-10] Section 22 (B); DA-(JV-023) 178-08; DA-(JV-023) 176-08; DA-(JV-022) 175-08; DA-(C-044) 164-08 Noble Built Construction & Development Corporation 26 Champaca Street, Sampaguita Village San Pedro, Laguna Attention: Mr. Rolando S. Villegas President Gentlemen : This refers to your letter dated June 18, 2009 requesting for exemption from taxes relative to the transfer of two (2) parcels of land to the Developer by virtue of a joint venture agreement. Documents submitted disclosed that Oscar L. Ramos, of legal age, divorced, American Citizen represented by Libertad L. Ramos as attorney-in-fact (attached is Special Power of Attorney), Lilia R. de Leon, Augusto L. Ramos, Renato L. Ramos, Erlinda L. Ramos; and Libertad L. Ramos (collectively referred to as the Landowners) are the co-owners of a property covered by Transfer Certificate of Title (TCT) No. T-550538 Lot 9 with an area of 46,689 square meters and 550537 Lot 8, with an area of 20,000 square meters located at Cavite; that on February 7, 2007, a Joint Venture Agreement was executed by the Landowners with Noble Built Construction and Development Corporation (Developer) for the development of a portion of the aforestated property into a residential subdivision project with a lot sharing of 60-40 in favor of the Developer for the resultant lots of the subdivision; that you now request for an opinion on the tax consequences of the following transaction: aSIDCT 1. That the JVA entered into by and between Noble Built Construction & Development Corp., and Renato L. Ramos and Libertad L. Ramos, et al., does not create a separate taxable entity; 2. That the allocation and distribution of the saleable lots are not subject to income tax, expanded withholding tax, value-added tax, or gross receipts tax and documentary stamp tax; 3. That the sale by Noble Built Construction & Development Corp., and Renato L. Ramos and Libertad L. Ramos, et al., of their respective shares in the saleable lots to third parties is generally subject to income tax, expanded withholding tax, value-added tax, or gross receipts tax and documentary stamp tax; and 4. The Revenue District Officer of the RDO having jurisdiction over the property is authorized to issue the Tax Clearance/Certificate Authorizing Registration with regard to the sale of saleable lots within the Project. In reply, please be informed that pursuant to Section 22 (B) of the Tax Code of 1997, the term "corporation" includes 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. P.D. No. 29 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 as additional income tax lien. 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 the Owner and the Developer is not subject to income tax under Section 27 of the Tax Code of 1997. The assignment by the Owner to the Developer of its corresponding share of the resultant subdivision lots in the aforesaid project is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax, because the aforestated assignment is a mere return of capital contribution, and therefore not a taxable event. (BIR Ruling No. DA-192-2001 dated October 17, 2001) The Sharing Scheme whereby the Owner and the Developer will allocate unto each other their shares in the saleable area, in consideration of their respective contributions, is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 because the allocation is made without monetary consideration and is not in connection with a sale. The allocation is made merely to segregate the saleable area between the parties, as the return of the capital which each has contributed. However, the acknowledgement to said Sharing Scheme is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. DA-240-2001 dated November 16, 2001) DIHETS 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 services and any person who imports goods shall be subject to VAT imposed in Sections 106 to 108 of the same Tax Code. Hence, by contributing the parcel of land, the Owner, neither sells, barters, exchanges goods or properties nor renders service 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) It is understood however, that 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 creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001 or capital gains tax under Section 24 (D) (1), 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, 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. 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) with regard to the (a) transfer of the titles to be received by the above-named Landowners and Developer based on their respective allocations pursuant to their agreement, without need of presentation of proof of payment of the creditable withholding tax, 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 net saleable area in accordance with the allocation ration in the Partition Agreement. For this purpose, a compliance report of the project indicating the number of residential lots, the respective TCTs and the party in whose name the corresponding title was issued. Lastly, since the Owner has authorized the Developer to market and sell particular lots of the Owner's on a case to case basis at ten percent (10%) agents commission, such commission shall form part of the taxable income of the Developer subject to expanded withholding tax and the commission paid to the Developer shall form part of the Owner's expense. 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 null and void. TICDSc Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner