Dizon Lands Realty and Dev't. Corp.

July 23, 2008 BIR RULING [DA-(JV-014) 068-08] Sec. 22; Joint Venture Dizon Lands Realty and Dev't. Corp. Angeles-Magalang Road, Pandan, Angeles City Attention: Ms. Lynette Lansangan Office Administrator Gentlemen : This refers to your letter dated May 8, 2008 requesting a ruling that the distribution or allocation to the co-venturers of their respective shares in the development project is exempted from the payment of income, capital gains and documentary stamp taxes imposed under Sections 24 (A), 24 (D) (1), 27 (A), 27 (D) (5) and 196, all of the Tax Code of 1997, as amended. It is represented that Kalahi Realty, Inc. (KRI) is the owner by purchase of a real property located in Alasas, San Fernando, Pampanga, described as follows: TCT No. Lot No. Area 21230-R 3278-C-4 31,217 Less: 800 sq.m. share of Mrs. Myrna Feliciano Mallari (excluded portion), the registered owner where KRI purchased the 30,417 sq.m. portion. Total Area = 30,417 sq.m. KRI is desirous to have its above property developed by Dizon Lands Realty and Dev't. Corp. (DLRDC), the developer, into a residential/commercial subdivision on a joint venture basis. The above property is still in the name of Mrs. Mallari and the transfer of the title thereof to KRI is still in process. The corresponding saleable lots per Joint Venture Agreement shall be distributed on a color-coding scheme as follows: THIASE DLRDC 50% ratio per color on all saleable lots KRI 50% ratio per color on all saleable lots In support of your request, you submitted copies of the Transfer Certificate of Title (TCT), Tax Declaration (TD) and the JVA executed. In reply, please be informed as follows: Section 22 (B) of the Tax Code of 1997, as amended, states as follows: "Section 22. Definitions. When used in this Title: xxx xxx xxx (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 partnerships' 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." (Emphasis supplied) The abovementioned exemption was initiated under Presidential Decree (PD) No. 929, dated May 4, 1976, which amended the definition of a "taxable" corporation in the Tax Code, as amended, to specifically exclude joint ventures formed for the purpose of undertaking construction projects. Said PD instituted the amendment of the definition of the term "taxable" corporation in recognition of the following situations: (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 local contractors to enter into joint ventures to pool, their limited resources in undertaking big construction projects. Hence, to assist the local contractors in achieving competitiveness with foreign contractors, the joint ventures formed by said local contractors were thus deemed as not falling under the definition of a "taxable" corporation, and thus not subject to income tax. This was, and still is, the intention of the legislature. Such being the case, the JVA entered into by DLRDC with the landowner, KRI, is not subject to the income tax imposed under Section 27 (A) of the Tax Code of 1997, as amended. HAICcD Moreover, the allocation of the saleable lots between DLRDC and the landowner, which is done effectively in consideration of their respective contributions, does not constitute a taxable event, as no income is actually realized by either the developer and/or the landowner. The partition or allocation will be made without consideration, and will not be in connection with any sale between the said parties. As has been ruled by the BIR on numerous occasions, income, in a broad sense, means all wealth which flows into the taxpayer other than as a mere return of capital (Section 36, RR No. 2) . The developer and the landowner, having contributed to the development of the aforementioned real property, will not realize any income upon the allocation of the saleable lots. Hence, the allocation of lots arising from the JVA executed by the above parties is not subject to capital gains tax, income tax, and consequently, to withholding tax. The said allocation, likewise, is not subject to VAT. Under Section 105 of the 1997 Tax Code, as amended, 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. However, by contributing the parcel of land, the landowner neither sells, barters, exchanges goods, property nor renders services 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). The developer and the landowner will only realize income upon their respective sales of the saleable lots allocated to each of them. In this regard, said sales to third parties, if ever undertaken by the developer and/or the landowner, would be subject to regular income tax at the rate of 35%, in accordance with Sections 24 (A) and 27 (A) of the 1997 Tax Code, as amended, and consequently to withholding tax as implemented under Revenue Regulations (RR) No. 2-98, as amended. The said sales by the developer and/or the landowner to third parties would likewise be subject to the VAT at the rate of 12%, in accordance with Sections 106 and 109 of the 1997 Tax Code, as amended, and to the Documentary Stamp Tax (DST) at the rate of fifteen pesos (P15.00) for each one thousand pesos (P1,000.00), or fractional part thereof in excess of one thousand pesos (P1,000.00) of such consideration or value, in accordance with Section 196 of the 1997 Tax Code, as amended. Further, the Partition Agreement that will be executed by the developer with the respective landowner, whereby the developer and the landowner allocate unto each other their corresponding shares in the saleable lots in consideration of their respective contributions, are not subject to the DST imposed under Section 196 of the 1997 Tax Code, as amended, considering that, as stated earlier, the allocation is made without monetary consideration and is not in connection with a sale. In this regard, Section 185 of the Revised Documentary Stamp Tax Regulations (Regulations No. 26)provides that "conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable". Accordingly, since the aforementioned Partition Agreement will be executed without consideration and not in connection with a sale between DLRDC and KRI, no DST therefore is due and collectible on said Partition Agreement. However, the notarial acknowledgment to said Partition Agreement shall be subject to the DST pursuant to Section 188 of the 1997 Tax Code, as amended, in the amount of P15.00. THESAD In connection with the above development project, the Joint Venture created and their respective co-venturers are hereby required to register with the Revenue District Office (RDO) where their principal place of business is located. Moreover, this ruling authorizes the Revenue District Officer of the revenue district where the properties are located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the transfer of the titles to the lots to be received by the developer and the landowner based on their respective allocations pursuant to the partition without need of presentation of proof of payment of the capital gains tax or the creditable Withholding Tax, Documentary Stamp Tax and Value-Added Tax and/or Donor's Tax. Prior to the above allocation of saleable lots, KRI is hereby required to settle first the taxes owing on the transfer of title of the subject realty from Myrna Feliciano Mallari in its favor. 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. CacEIS Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service