Agro-Macro Development Corporation

May 21, 2010 BIR RULING [DA-(JV-016) 073-10] Section 22 (B); DA-450-2004 Agro-Macro Development Corporation #21 Paseo Annabelle, Ma. Luisa Estate Park Banilad, Cebu City Attention: Ms. Annabelle O. Aboitiz Gentlemen : This refers to your letter dated March 4, 2009 requesting a confirmatory ruling to the effect that the Joint Venture Agreement (JVA) between Sps. Edgar C. Adlawan and Lydia T. Adlawan, landowners and Agro-Macro Development Corporation (Agro-Macro), developer, will have the following tax consequences: DaAETS 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. Documents submitted disclosed that Spouses Edgar C. Adlawan and Lydia T. Adlawan are the absolute owners in fee simple of one (1) parcel of land situated at Barangay Pulangbato, City of Cebu, Philippines, known as Lot 10546 Cebu Cadastre 12, Extension, covered by TCT No. 4023, containing an area of three thousand seventeen (3,017) square meters, more or less; that Agro-Macro Development Corporation is a corporation duly organized and existing under and by virtue of the laws of the Philippines; that Spouses Adlawan and Agro-Macro executed a Memorandum of Agreement over the said parcel of land which they intend to develop into a residential subdivision; that Spouses Adlawan had requested Agro-Macro to develop only Lots 10546-A, B, C, D, E, F, G, H, I, K & L, with a total area of One thousand five hundred one (1,501) square meters, more or less, with the remaining area to be retained by Sps. Adlawan; that the parties further agree, viz. : "1.1 FIRST PARTY (Sps. Adlawan) agrees to grant a road right of way to DEVELOPMENT 1.2 FIRST PARTY, for and in consideration of the prestations due herein from SECOND PARTY to FIRST PARTY, does hereby grant a right of way over Lot 10546-L and 10546-K, more particularly described in Annex "A", and made integral part hereof, for the purpose of providing motor vehicle access to DEVELOPMENT; 1.3 The right of way herein granted is not limited to the lots within DEVELOPMENT bust as a perpetual right of way of Kahayahay I Subdivision, Redstone Village, Cebu Hope Center (Lot 10830), Lot Nos. 10764, 10762-A, 10570, 10769-new, 10763, 10768, 10837, 10827, 10833 10829, 10835, 10840 and 10836, which are all located in Barangay Pulangbato, Cebu City. To insure the effectiveness of these limitations and for and in consideration of the prestations of SECOND PARTY, including the maintenance and real estate taxes of this road lots, under this agreement, FIRST PARTY hereby agrees to assign all roads within DEVELOPMENT to SECOND PARTY. A condition shall be annotated in titles of said road lots that they may be used only by members in good standing of the above mentioned lots and subdivision's association." ACETSa and that as provided for in the Division of Property Agreement, the parties agreed to divide and apportion the lots as follows: I. Lots Pertaining to Sps. Edgar C. Adlawan and Lydia T. Adlawan (Group A) Lot No. Area in sq. m. 10546-A 97 10546-B 91 10546-C 91 10546-D 85 10546-E 93 10546-J 1,198 10546-M 148 10546-N 170 Total 1,973 ==== II. Lots Pertaining to Agro-Macro Devt. Corp. (Group B) Lot No. Area in sq.m. 10546-F 105 10546-G 96 10546-H 95 10546-I 83 10546-L (Road) 280 10546-K (Road) 385 Total 1,044 ==== 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 Sps. Edgar C. Adlawan and Lydia T. Adlawan, landowners and Agro-Macro Development Corporation is not a corporation subject to corporate income tax. However, for VAT purpose, the joint venture (or consortium) is by itself a taxable entity. AHcaDC 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 Agro-Macro 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 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. DTISaH 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