KEMMP Realty Corporation

March 10, 2009 BIR RULING [DA-(JV-015) 146-09] Section 22 (B); DA-450-2004 KEMMP Realty Corporation Km. 76 McArthur Highway Mary Grace Heights, Sindalan San Fernando, Pampanga Attention: Ms. Pamela S. David President Gentlemen : This refers to your letter dated February 4, 2009 requesting a confirmatory ruling to the effect that the Joint Venture Agreement (JVA) between you and the landowner, Mr. Enrico M. Pineda, will have the following tax consequences: 1. The JVA will not create a separate taxable joint-venture within the meaning of Section 22 (B), in relation to Section 27 (A) of the Tax Code of 1997, as amended; and 2. Since the JVA will not create a separate taxable joint-venture, the subsequent division and allocation of ownership of the developed property between the parties will not be subject to income tax. It is represented that KEMMP Realty Corporation (KEMMP) is a corporation organized and existing under the laws of the Philippines with principal office address at Km. 76 McArthur Highway, Mary Grace Heights, Sindalan, San Fernando, Pampanga is engaged in real estate business of all kinds; that KEMMP is registered with the Securities and Exchange Commission (SEC) on December 9, 2003 with SEC Reg. No. CS2003342327; that it is also registered with the Bureau of Internal Revenue with TIN 228-370-242-000; that KEMMP entered into a Joint Venture Agreement (JVA) with Mr. Enrico M. Pineda with residential address at Barangay Alasas, San Fernando, Pampanga; that both parties in the JVA agreed to have a sharing of 60%-40% ratio on the developed and saleable area; that the KEMMP also commits the development of the area contributed by Mr. Pineda; and that under the JVA executed on December 22, 2008, the parties have agreed on the terms and conditions which are as follows, viz. : SIDEaA LIABILITY OF THE DEVELOPER (KEMMP) All persons hired or engaged by the Developer or whose services are to be utilized in the development of the subject property shall be the sole responsibility of the Developer and none of them shall be deemed to be the employees of the Landowner. The Developer shall be solely responsible for the payment of all salaries and compensation, and other benefits due to all employees, laborers, persons or entities involved in the project. The Landowner shall not be held responsible for any act, omission, or negligence of the employees, workers, and staff of the Developer, resulting in losses, damages, injury or death occasioned by their employment. DEVELOPER'S WARRANTY ON COMPLIANCE The Developer shall be solely liable and responsible to the government agencies concerned and/or to the third parties for whatever violations of any law, regulation, rules or standards as to the development of the subdivision pending formal turn-over to the proper government agencies of road lots and open spaces or until after the issuance of a certificate of the completion by the HLURB, whichever comes first. LANDOWNER'S WARRANTIES They have lawful, genuine, and valid title over the subject parcel of land and that its interest and title thereto is such that it can effectively and legally transfer the same to the Developer; The Developer shall have peaceful possession of the subject property and that the same is not covered by CARP, nor is planted to rice, corn and/or any other crops and that the property is not tenanted or occupied by squatters; The Landowner shall shoulder the expenses and oblige himself to clear the subject parcel of land (if any) of occupants, tenants, squatters, or adverse claimants within sixty days from the signing of this agreement; All real estate taxes and assessments on the subject property as of the date of the signing of this Agreement have been fully paid by the Landowner; The subject property is not involved in any litigation nor the subject of any claim by any third party; The subject property is free from any liens or encumbrances whatsoever and is not the subject of any existing joint venture or any other agreement with any other person or entity. In reply, please be informed as follows: 1. 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, this Office hereby confirms your opinion that the joint venture of KEMMP Realty Corporation and Mr. Enrico M. Pineda is not a corporation subject to corporate income tax. However, for VAT purposes, 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. 2. The allocation of saleable lots of the Project between you, as Developer and the Landowner 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. The Subdivision Contract whereby you and Mr. Pineda 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 Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the NIRC, as amended. 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) and Sec. 24 (D) (1) 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. 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 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 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service