Atty. Miriam Gonzaga-Daway

August 12, 2008 BIR RULING [DA-(JV-016) 132-08] Section 22 (B); DA (JV-011) 035-2008 dtd. 7/15/08 Atty. Miriam Gonzaga-Daway Unit 1505 OMM Bldg., San Miguel Ave. Ortigas Center, Pasig City M a d a m : This refers to your letter dated July 4, 2008 in behalf of your client, LANDCO NE RESOURCES VENTURES, INC., requesting a clarificatory ruling on the following to wit: What would be the taxes involved when the parties agree to a sharing of resultant subdivided lots, wherein Arcinue Acuna Construction Ventures, Inc., being the developer, shall receive 50% of the resultant subdivided lots in return for the development of properties, while Landco NE Resources shall retain 50% of the resultant subdivided lots, being the owner of the properties; Would there be capital gains and documentary stamps (and if there is, how much) when the parties eventually execute and register the Memorandum of Sharing of Subdivided lots or a Deed of Assignment in favor of Arcinue Acuna Construction Ventures, Inc. for the transfer of titles covering the developer's share in the project; What would be the taxes involved when the parties eventually sell their respective share of saleable lots to third parties? STIEHc It is represented that your client, Landco NE Resources Ventures, Inc. (Landco NE, for short) entered into a Memorandum of Agreement with Arcinue Acuna Construction Ventures, Inc. (the Developer) for the development of the former's property located at Calasiao, Pangasinan, covering an area of 31.6 has. into a residential subdivision; that the said agreement provides that Arcinue Acuna Construction Ventures, Inc. shall provide the expertise and manpower and shall assume all expenses in the planning and construction/development of the subdivision and in return, the parties agree to share in the resultant subdivided/developed lots, on a 50-50 sharing arrangement; that on November 19, 2007, Landco NE (the Landowner) entered into a Memorandum of Agreement with Arcinue Acuna Construction Ventures, Inc. (the Developer) for the development of the latter's property with a total area of 31.6 hectares located at Calasiao, Pangasinan, into a residential estate with a lot sharing of 50%-50%., for the resultant subdivided lots; that in accordance with the agreement, the Developer has prepared the master plan and the parties have shared the resultant subdivided lots; that the project is now in the process of securing all permits and licenses. The project shall be referred to as "Woodside Park Subdivision"; that a Memorandum of Sharing was already executed between the parties agreeing to the expected subdivided lots in a portion of the project, consisting of 164,420 sq.m. In reply, please be informed as follows: 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. DICcTa 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, the joint venture of Landco NE and Arcinue Acuna Construction Ventures, Inc. (the Developer) is not a corporation subject to corporate income tax. However, for VAT purpose, 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 transfer are also not subject to value-added tax (VAT), since the transfers are not in the course of business but capital contributions. In view of the above, there will be no taxes involved in the event that Landco NE transfers and assigns to Arcinue Acuna Construction Ventures, Inc. fifty percent (50%) of the resultant subdivided lots in return for the latter's cost of development. The allocation of saleable lots of the Project between Arcinue Acuna Construction Fentures, Inc. and Landco NE, 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. DaAETS The Memorandum of Sharing whereby Landco NE and Arcinue Acuna Construction Ventures, Inc. 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 Memorandum of Sharing is subject to the documentary stamp tax pursuant to Section 188 of the NIRC, as amended. Thus, inasmuch as there is no monetary consideration but a mere return of capital, the eventual execution and registration of the Memorandum of Sharing of subdivided lot is not subject to capital gains and documentary stamp taxes. 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) 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. EIAHcC Finally, the joint venture or the party who undertakes the development of the project shall file an Annual Information Return and other returns required to be filed with the RDO where it is registered or required to be registered. This will authorized 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, through the Law Division, of the fulfillment of the requirement on the distribution of the developed/saleable lots/units in accordance with the allocation ratio in 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service