Filinvest Land, Inc.

August 28, 2009 BIR RULING [DA-(JV-017) 481-09] 22 (B); DA (JV-007) 019-08; DA (JV-031) 251-08; DA-194-2006; DA-192-2001; DA-240-2001 Filinvest Land, Inc. 173 P. Gomez St. San Juan City Attention: Atty. Juan R. Bernardino, Jr. Tax Counsel Gentlemen : This refers to your letter dated August 29, 2008 requesting a ruling on the tax consequences of the Joint Development Agreement (JDA) executed by and between Filinvest Land, Inc. (FLI) and Niyog Property Holdings, Inc. (NPHI) for the subdivision and horizontal development of the latter's properties. It appears that FLI is a corporation duly organized and existing under the laws of the Philippines and is engaged in the business of acquiring, developing and selling real estate, including residential subdivisions. On the other hand, NPHI is the absolute owner of fifteen (15) parcels of land covered by Transfer Certificates of Title (TCT) Nos. T-1202260, T-1202261, T-1202262, T-1202263, T-1202264, T-1202265, T-1202266, T-1202268, T-1202269, T-1202270, T-1202303, T-1202305, T-1202308, T-1095242, and T-1095243 (collectively, the "Subject Properties"). The said real properties with an aggregate area of 440,750 square meters, more or less, are located in Niog, Bacoor, Cavite. On August 13, 2008, FLI, as the developer, entered into a JDA with NPHI for the subdivision and horizontal development of the Subject Properties. The salient portions of the said JDA are as follows: DHCcST 1. FLI shall undertake the subdivision and horizontal development of the Subject Properties, a residential project which development shall include improvements and facilities as agreed upon in the Master Plan for Development ("Plan"); 2. FLI shall shoulder all the equipment, engineering and labor expenses incurred relative to the subdivision and horizontal development of the said Project; 3. For and in consideration of the development obligations and undertakings it will assume, FLI will receive fifty percent (50%) of the saleable lots which shall result from said subdivision and horizontal development. The remaining fifty percent (50%) shall be retained in ownership by NPHI; 4. Upon approval of the subdivision plan by the proper government agencies the parties shall allocate the saleable units in accordance with their aforesaid sharing, in the most equitable and practical way possible, with due consideration and regard to the terrain, location, and projected values of such units. SIcCEA Upon completion of the afore-mentioned properties, FLI and NPHI would enter into a Partition Agreement, whereby the developed saleable lots would be allocated between themselves, based on the terms of the above JDA. Said Partition Agreement would adjudicate the saleable lots between the parties, as part of their respective shares in the project and to allow the registration of said allocated saleable lots in their respective names. Based on the foregoing, you now request confirmation that: 1. The JDA between FLI and the NPHI, for the subdivision and horizontal development of the above-mentioned properties will not give rise to a taxable joint venture as provided under Section 22 (B), in relation to Section 27 (A) both of the Tax Code of 1997; 2. The allocation of saleable lots between FLI and NPHI in consideration of their respective contributions, as stipulated in the JDA, is not a taxable event and is not subject to income tax, and subsequently to withholding tax and the Value-Added Tax (VAT), since the allocation of saleable lots is in fact a mere return of capital that each has contributed; 3. The Partition Agreement whereby FLI and NPHI would allocated unto each other their share in the saleable lots in consideration of their respective contributions is not subject to the Documentary Stamp Tax (DST) imposed under Section 196 of the 1997 Tax Code, as amended, nor to any income tax, and consequently to withholding tax, since the allocation is made without monetary consideration and is not in connection with a sale. Rather, the partition will be made merely to segregate the saleable lots between the parties, as the return of the capital which each has contributed. However, it is understood that should FLI and/or the NPHI sell any of the saleable lots allocated to them, to third parties, the gain that may be realized from said sale will be subject to regular (corporate) income tax at 30%, in accordance with Section 24 of the 1997 Tax Code, as amended, and consequently to withholding tax as implemented under Revenue Regulations (RR) No. 2-98, as amended. TaDSHC In reply, please be informed as follows: 1. Pursuant to Section 22 (B) of the Tax Code of 1997, 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 so 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 Sec. 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 FLI and NPHI is not a corporation subject to corporate income tax. However, for VAT purposes, the joint venture (or consortium) is by itself a taxable entity. 2. The allocation of the saleable lots of the project between FLI and NPHI, in consideration of their respective contributions, as stipulated in their agreement 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 has contributed. (BIR Ruling No. DA-192-2001 dated October 17, 2001) HESAIT The transfer is also not subject to VAT since under Section 105 of the Tax Code of 1997, 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 imposed in Sections 106 to 108 of the same Tax Code. Hence, by contributing its parcels of land, NPHI, neither sells, barters, exchanges goods, property nor renders services to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001) 3. The Partition Agreement whereby FLI and NPHI will allocate unto each other their shares in the saleable lots in consideration of their respective contributions is not subject to the DST imposed under Section 196 of the Tax Code of 1997, 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 has contributed. However, the acknowledgment to said Partition Agreement is subject to the DST pursuant to Section 188 of the Tax Code of 1997, as amended. It is understood however, that 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 creditable withholding tax (CWT) under Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001 or capital gains tax under Section 27 (D) (5), as the case may be. Moreover, such sale shall be subject to the DST imposed under Section 196 of the Tax Code of 1997, as amended based on the gross selling price or fair market value of the properties, whichever is higher. Furthermore, the said sale shall likewise 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 Partition Agreement, without need of the presentation of proof of payment of the CWT, VAT and the corresponding DST. Provided, that the parties to the joint venture shall cause the Register of Deeds to annotate on the TCT 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 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 in accordance with the allocation ratio in the JDA. For this purpose, a compliance report of the project indicating the number of lots developed/built, the respective TCTs and the party in whose name the corresponding title was issued. IaHSCc This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner