Atty. Alan B. Quintana

June 4, 2010 BIR RULING [DA-(JV-018) 086-10] 22 (B); 274-92; DA 268-98 Atty. Alan B. Quintana 2nd Floor, Renaissance Tower Meralco Avenue, Pasig City Sir : This refers to your letter dated July 13, 2008 stating that your client, Trinidad O. Go (GO) is the registered and legal owner of a parcel of land located at Barangay Gusa, Cagayan de Oro City with an aggregate area of 34,000 square meters covered by TCT No. T-81496 issued by the Registry of Deeds for Cagayan de Oro City; that GO wishes to cause the subdivision and development of the above-mentioned property into a first class residential subdivision; that G&P Builders, Inc. is a corporation organized and existing under the laws of the Philippines with office address at 106 Julio Pacana Street, Puntod Cagayan de Oro City; that it is habitually engaged in the construction business, and has competent engineering expertise in the civil works required in the development of the real estate projects; that on the other hand, Fil-Estate Properties, Inc. is a real estate developer having the facilities and technical know-how in the development work required in the subdivision of the property; that on April 21, 2005, a Project Agreement was entered into by GO, G&P Builders, Inc. and Fil-Estate Properties, Inc. whereby G&P Builders, Inc. and Fil-Estate Properties, Inc. have agreed to jointly undertake the subdivision and development of the property into a first class residential subdivision; that from the subdivision of the real properties they contributed and pooled together, the parties will partition, allocate, and assign to each party the resulting net saleable lots as follows: HIACac TRINIDAD O. GO No. Block Lot Area 1 1 2 350 2 1 3 350 3 1 4 350 4 1 6 350 5 1 7 350 6 1 8 350 7 1 11 350 8 1 12 350 9 1 13 351 10 1 16 350 11 1 17 350 12 1 18 350 13 2 1 536 14 2 6 369 15 2 9 370 16 2 10 346 17 2 16 384 18 3 1 570 19 3 2 350 20 3 6 434 21 3 7 424 22 3 10 350 23 3 11 350 24 3 12 350 25 3 16 350 26 3 17 350 27 3 22 381 G&P BUILDERS, INC. No. Block Lot Area 1 1 1 390 2 1 5 350 3 1 9 350 4 1 10 350 5 1 14 351 6 1 15 350 7 1 19 350 8 2 2 382 9 2 7 362 10 2 12 404 11 2 13 397 12 2 17 350 13 3 3 350 14 3 4 350 15 3 8 632 16 3 9 518 17 3 13 350 18 3 14 351 19 3 15 350 20 3 18 350 21 3 19 350 22 3 23 534 23 3 24 457 24 3 26 511 25 3 27 574 FIL-ESTATE PROPERTIES, INC. No. Block Lot Area 1 1 20 358 2 2 3 420 3 2 4 479 4 2 5 393 5 2 8 358 6 2 11 389 7 2 14 375 8 2 15 418 9 2 18 367 10 3 5 350 11 3 20 350 12 3 21 350 13 3 25 457 and that titles to road lots, garbage disposal lots, open space and community facilities, respectively identified as Roads 1 and 2, Lot 21 of Block 1, and Lots 21, 22, 19 and 20 of Block 2, shall be issued jointly in the names of GO and G&P Builders. Based on the foregoing representations, you now request for exemption from capital gains tax/creditable withholding tax, documentary stamp tax and value-added tax on the partition and assignment of subdivision lots under a joint venture arrangement for the development of a parcel of land situated in Barangay Gusa, Cagayan de Oro City. 1. The JVA executed between the Developer and Landowner described as an agreement between the parties therein for the subdivision and development of the aforementioned lots into a residential subdivision is neither a contract of sale over real property nor an instrument which conveys title to real property. Consequently, no income tax or documentary stamp tax (DST) is due upon the execution of the JVA (Section 186 of Revenue Regulations No. 26). However, the notarial acknowledgment on the JVA is subject to the DST on certification pursuant to Section 188 of the Tax Code of 1997. 2. 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. It is to be emphasized, however, that P.D. 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 that it is the intention of the legislature to exclude joint venture or consortium formed for the purpose of undertaking construction projects from the definition of taxable corporation, this Office holds that the JVA entered into by GO, as the Landowner, and G&P Builders, Inc. and Fil-Estate Properties, Inc., as Developer, is not subject to the corporate income tax under Section 27 (A) of the Tax Code of 1997. However, the co-venturers are separately subject to the regular corporate income tax or individual income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. EISCaD 3. The allocation and distribution of the respective shares of the Parties in the Project consisting of lots in consideration of their respective contributions, as stipulated in the Agreement is not a taxable event and is not subject to income tax, withholding tax, value-added tax and documentary stamp tax because the allocation is a mere return of capital that each has contributed. 4. The Partition Agreement to be executed by the Parties whereby they allocate and distribute between them their respective shares in the Project in exchange for their respective contributions is without monetary consideration is not subject to the corresponding documentary stamp tax prescribed in Section 196 of the Tax Code of 1997, as amended. However, the notarial acknowledgment is subject to the P15.00 documentary stamp tax prescribed in Section 188, supra . 5. Finally, 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) or 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 BIR, through the Law Division, of the fulfillment of the requirement on the distribution of the developed/saleable lots/units in accordance with the allocated ratio in the Joint Venture Agreement. Provided finally, that each of the co-venturers shall report their income on the sale of the allocated developed units. 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. 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 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. aCcHEI Very truly yours, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal & Inspection Group