Tantoco, Tayag & Tan Law Offices Legal Consultancy

July 22, 2008 BIR RULING [DA-(JV-015) 069-08] 22 (B); # 071-98; # 039-2002; 20-2002; DA-018-2006; DA-586-2007; Memo-040-2003 Tantoco, Tayag & Tan Law Offices Legal Consultancy Unit 7f, 7th Floor, One Joroma Place Congressional Avenue, Quezon City Attention: Atty. Ninel G. Tayag For the Firm Gentlemen : This refers to your letter dated December 3, 2007 requesting on behalf of your client, Bacolod Real Estate Development Corporation ("BREDCO") for an opinion on the tax implications of the agreement entered into between the City of Bacolod, together with the Public Estates Authority (PEA), and Bacolod Real Estate Development Corporation (BREDCO) in connection with the Reclamation Project undertaken by the City of Bacolod. HSTAcI The facts, as represented, are as follows: The City of Bacolod is a municipal corporation duly organized and existing under the laws of the Republic of the Philippines and its charter, Commonwealth Act No. 326, as amended. PEA, on the other hand, is a government-owned and controlled corporation created under Presidential Decree No. 1084, while BREDCO is a duly organized and existing domestic corporation, with business address at Reclamation Area, City of Bacolod. On December 31, 1961, by virtue of Republic Act Nos. 1899 and 2264 and the City of Bacolod Ordinance No. 157, Series of 1961, the City of Bacolod, represented by its then mayor, Hon. Teofisto Cordova and BREDCO, represented by its President, Atty. Simplicio A. Palanca, entered into an agreement (Original Agreement) under which the City of Bacolod conveyed and ceded exclusively in favor of BREDCO the right to reclaim at least 250 hectares of foreshore land and to undertake its development. Pursuant to the Original Agreement, BREDCO shall advance all expenses necessary for the reclamation and development of the foreshore land for which it shall be paid by the City of Bacolod share in the reclaimed area based on the Land Allocation Plan. On March 16, 1995, the City of Bacolod and BREDCO, entered into a Comprehensive Revised Reclamation Agreement (CRRA) to supplement, revise and amend the Original Agreement entered into on December 31, 1961, in order to extend the period of effectivity of the reclamation agreement up to December 31, 2008 to complete the original contracted area of at least 250 hectares. In April 1998, PEA, represented by its then General Manager, Arsenio B. Yulo, the City of Bacolod and BREDCO entered into a Memorandum of Understanding (MOU) to define the general terms and conditions of the reclamation and development of the remaining portions of the reclamation project and the titling of the already reclaimed portions. It was likewise agreed that the MOU would be the basis of a subsequent agreement that would define in detail the terms and conditions acceptable to all parties. Pursuant to the provisions of the MOU, PEA, represented by its the General Manager, Arsenio B. Yulo, the City of Bacolod, represented by its then Mayor Evelio R. Leonardia and BREDCO, represented by its President Atty. Simplicio A. Palanca, entered into a Memorandum of Agreement (MOA) on May 18, 2000 to define in detail the terms and conditions of the reclamation, development and sharing among the parties of the remaining 108.24 hectares of land to be reclaimed as well as sharing on the 24.5728 hectares of land already reclaimed, and the undertakings of each party for the completion of the Project. The essential features of the MOA are as follows: 1. The Original Agreement dated December 31, 1961, the CCRA dated March 16, 1995 and the MOU dated April 1998 shall be made integral part of the MOA. IHcSCA 2. The term "Project" shall refer to the completion of the Rawland Reclamation and Horizontal Development of one hundred eight (108) hectares, more or less, of foreshore and offshore areas of Bacolod City, all in accordance with the Approved Master Development Plan and specifications (Article I). 3. BREDCO shall undertake the Project over a period of six (6) years from receipt of Notice to Proceed (Article VI, paragraph 1.a.) and shall finance the cost pertaining to the Project, including but not limited to the costs of securing permits and licenses, clearing of the Project site, reclamation and land development works, and undertaking the actual Rawland Reclamation and Horizontal Development Works, in accordance with Approved Master Development Plan, specifications and time frame at no financial cost to the Government (Article III, paragraph B.3.1). 4. With respect to the unreclaimed area of 108.2384 hectares, the land shares shall be as follows: i. BREDCO Share 52.50% ii. Government Share 47.50% The share of the Government is inclusive of the thirty percent (30%) roads and open spaces and easements of the saleable areas which are allocated between PEA and City of Bacolod. (Article V, paragraph 1.a) 5. With respect to the ground area of 24.5728 hectares already reclaimed and ready for titling, the sharing shall be as follows: i. BREDCO Share 57% ii. Government Share 43% Out of the Government Share, the City of Bacolod will be allocated from share out of the saleable areas equivalent to ten percent (10%) of the gross Project areas of 2.46 hectares, more or less, and the remaining saleable areas or 0.740 hectare, more or less, shall be the share of PEA. cTECIA 6. PEA shall supervise and monitor all reclamation and development works in the project, for which BREDCO shall pay PEA a regulatory fee amounting to 2.5% of the approved total rawland reclamation cast (Article VI, paragraph 2.a.). 7. Upon effectivity of the MOA and upon completion of the reclaimed lands to the required elevation, PEA shall indorse to DENR for issuance of presidential proclamation declaring the reclaimed lands as alienable and disposable and shall thereafter secure the Special Patent and Original Certificate of Title thereto (Article VII, paragraph 3). After which, PEA shall execute the Deed of Transfer or Conveyance of the land titles to the City of Bacolod and BREDCO representing their respective shares based on the Land Allocation Plan (Article VII, paragraph 4). Out of the unreclaimed 108.24 hectares, 48.0056 hectares or 480.056 square meters, have been fully reclaimed and titled in the name of PEA of which 30.36 hectares, or 303,601 square meters, are covered by Special Patent Nos. T-3637 and T-3638, and 17.6455 hectares or 176,455 square meters are covered by Special Patent No. 3710. On September 20, 2002, PEA had already conveyed to BREDCO ten (10) titles covering 183,904 square meters, which constitutes BREDCO's share in the 303,601 square meter-portion of the reclaimed areas covered by Special Patent Nos. T-3637 and T-3638. Afterwhich, a Deed of Conveyance was executed between PEA and BREDCO to transfer two (2) titles covering 11,130 square meters and seven (7) titles covering an area of 79,882 square meters or a total area of 91,012 square meters representing BREDCO's share in the 176,455 square meters of reclaimed area covered by Special Patent No. 3710. In connection therewith, you now request confirmation of your opinion that: 1. The MOA executed by and between BREDCO as the Developer, and City of Bacolod, under the supervision of PEA for the reclamation and development of unreclaimed portion of foreshore lands will not give rise to a taxable joint venture as provided under Section 22 (B), in relation to Section 27 (A), both of the National Internal Revenue Code (NIRC), as amended; TDAHCS 2. The land sharing/allocation of reclaimed lands between the City of Bacolod, BREDCO and PEA in consideration of their respective contributions/undertakings, as stipulated in the MOA, is not a taxable event and is not subject to income tax, and subsequently creditable withholding tax, documentary stamp tax and the Value-Added Tax (VAT), since the allocation of the reclaimed lands is in fact a mere return of capital that each has contributed. 3. The Deed of Conveyance of land titles to BREDCO representing its share in the reclaimed land is made without consideration and is not in connection with a sale, thus, not subject to documentary stamp tax imposed under Section 196 of the NIRC, as amended. In reply, please be informed that this Office had passed upon similar issues in BIR Ruling No. Memo-040-2003 dated October 7, 2003, the facts of which are in all fours with the case at bar. In the said ruling, a reclamation project was undertaken between the City Government of Cavite and a private contractor, D.M. Wenceslao & Associates, Inc. The parties entered into a Memorandum of Agreement (MOA) together with the Public Estates Authority to agree on the terms and conditions of the reclamation and development of the property with the City Government contributing its right to reclaim the land, and D.M. Wenceslao financing the cost of the reclamation and construction project. The MOA provided that in exchange for their respective contributions, parties will be allocated shares in the reclaimed land at a 40:60 sharing ratio. In ruling that the MOA is in effect a joint venture agreement, this Office explained as follows: "It has been noted that a 40:60 sharing in favor of the City of Cavite and D.M. Wenceslao and Associates, Inc, respectively, was equally provided for in the MOA. The subsequent actual distribution or conveyance of the predetermined share of each partner in the reclaimed share is a provision common to all construction joint venture undertakings. Under 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 [In fine, P.D. No. 929 amended the definition of a taxable corporation so as not to include joint venture formed for the purpose of undertaking construction projects. One of the reasons cited for such amendment is that local contractors contribute substantially to the development program of the country.] The term "joint venture" usually connotes an enterprise of a more limited scope and duration than a Partnership, although the terms are often considered synonymous and both indicate similar types of liability for debts and torts. In one case, the Supreme Court defined the term "joint venture" as an association of persons or companies jointly undertaking some commercial enterprise; generally all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith and duty which may be altered by agreement to share both in the profit and losses. AcEIHC While there is no joint venture agreement to this effect it can be ascertained from the tenor of the MOA and at the time of the inception of the reclamation and development projects that the parties intended an unincorporated joint venture. In the Kilosbayan case (232 SCRA 143) the Supreme Court, in sustaining the existence of a joint venture between PCSO and PGMC held that "whether the contract in question is one of lease or whether PGMC is merely an independent contractor should not be decided on the basis of the title or designation of the contract but by the intent of the parties which may be gathered from the provisions of the Contract itself. Animus hominis est anima scripti . It further ruled that "[A] careful analysis and evaluation of the provisions of the contract and a consideration of the contemporaneous acts of the PCSO and PGMC indubitably disclose that the contract is not in reality a contract of lease under which the PGMC is merely an independent Contractor for a piece of work but where the statutorily proscribed collaboration or association in the least, or joint venture, at the most, exists between the contracting parties . . . ." In his concurring opinion, Justice Padilla noted that "on a slightly different plane and perhaps simplified, I consider the agreement or arrangement between the PCSO and PGMC a joint venture because each party to the contract contributes its share in the enterprise or project. PGMC contributes its facilities, equipment and know-how. PCSO contributes (aside from its charter) the market, directly or through dealers and this to me is most important in the totality or mass of the Filipino gambling elements who will invest in the lotto tickets. PGMC will get its 4.9% of gross receipts (with assumption of certain risks in the course of lotto operations); the residue of the whole exercise will go to PCSO. To any person with a minimum of business know-how, this is joint venture between PCSO and PGMC, plain and simple." Applying the foregoing discussion, this Office proceeded to characterize the existence of a joint venture between the City of Bacolod and BREDCO, as follows: 1) The required pooling of capital contributions in the joint venture reclamation undertaking was adequately satisfied, to wit: a) on the part of the City of Bacolod, the statutory right to undertake a reclamation project within the Local Government Unit, and 2) on the part of BREDCO, the reclamation and development services and expenses. aHESCT Likewise, both parties share interest in the performance of the subject matter, although in different planes as each party functioned independently in the discharge of its assigned role as stipulated in detail under the MOA. Furthermore, both parties, notwithstanding any provision to the contrary in the MOA, are deemed responsible for damages that could have been sustained by the joint venture in undertaking the reclamation project as provided for in Art. 1794 of the Civil Code.This liability for debts and torts is another element crucial to the determination of the existence of a joint venture undertaking. Finally, a reclamation undertaking is a sovereign act for indeed the right to reclaim a portion of the seashore is vested solely by law to the LGU concerned, i.e. , the City of Bacolod in the instant case. The concerned LGU has the prerogative to resort to certain ways and means to accomplish this end. To secure the financial cost and expenses of the reclamation and construction undertaking, the LGU concerned may enter into a joint venture undertaking with another entity. Surely, the city government is not proscribed from entering into a contract with a duly pre-qualified contractor for the financing, construction, operation and maintenance of any viable infrastructure projects or local development plans and public investment program priority projects pursuant to Sections 302 (a) and (b) of R.A. No. 7160, with the contractor to be entitled to a reasonable return of its investment in accordance with its bid proposal as accepted by the local government unit concerned. In the case of land reclamation, the repayment plan may consist of the grant of a portion or percentage of the reclaimed land. (Sec. 302 (c) (4), R.A. No. 7160) Thus, for purposes of undertaking a reclamation and development project, the taxation or non-taxation applicable to a joint venture undertaking construction projects may be applied in principle to the reclamation and development project being undertaken by the City of Bacolod and BREDCO. Hence, for purposes of taxation, previous BIR rulings issued by this Office on the distribution of the capital contribution to the co-ventures should be equally applied. Therefore, the joint venture itself should not be subject to income tax; rather its partners are directly taxed individually on their income, taking into account their share of partnership gains and losses. Moreover, the allocation and distribution of the reclaimed lands between the City of Bacolod, PEA and BREDCO in accordance with their respective contributions as stipulated in MOA is not subject to income tax, withholding tax or capital gains tax, since the allocation/distribution is without consideration, not in connection with a sale and constitutes a mere return of capital. Likewise, the said allocation and distribution is not subject to DST for want of consideration. With respect to the DST on the Deed of Conveyance, Section 196 of the 1997 Tax Code provides that "on all conveyance, deeds, instruments, or writings, other than grants, patents or original certificates of adjudication issued by the Government, whether any land, tenement or other realty sold shall be granted, assigned, transferred or otherwise conveyed to the purchaser or purchasers or to any other person or persons designated by such purchaser or purchasers, there shall be collected a documentary stamp tax, at the rates herein below prescribed, based on the consideration Contracted to be paid for such realty or its fair market value determined in accordance with Section 6 (E) of this Code whichever is higher; Provided, That when one of the contracting parties is the Government, the tax herein imposed shall be based on the actual consideration. SECHIA Anent the foregoing provision, Section 185 of Revenue Regulations (RR) No. 26 provides that "Conveyances of realty, not in connection with a sale, to trustees or other persons without consideration are not taxable." In the instant case, however, the conveyance was made in payment of BREDCO's reclamation and development expenses pursuant to the provisions of the MOA. Such being the case, there being no sale, but rather a return of BREDCO's expenses as part of its share in the project, the same does not fall within the coverage of Section 196 of the Tax Code and therefore, not subject to the DST imposed under Section 196 of the Tax Code of 1997, as amended by Republic Act No. 9243. This will serve as an authority for the Revenue District Officer, Revenue District Office No. 77, Bacolod City, to issue the requested Certificate Authorizing Registration (CAR) involving the portion of the (two (2) titles covering 11,130 square meters and seven (7) titles covering an area of 79,882 square meters or a total area of 91,012 square meters representing BREDCO's share in the 176,455 square meters) reclaimed area covered by Special Patent No. 3710. Finally, this ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service