Filinvest Land Incorporated

September 1, 2009 BIR RULING [DA-(JV-018) 482-09] Section 22 (B); DA(JV-040)381-2008 dtd. 11/3/08 Filinvest Land Incorporated 173 P. Gomez St., San Juan Metro Manila Attention: Atty. Juan R. Bernardino, Jr. Tax Counsel Gentlemen : This refers to your letter dated May 8, 2009, requesting a confirmation of your opinion that: The Development Agreement between Filinvest Land, Inc. (FLI) and Tierra Azul Development & Trading, Inc. (TADTI), for the subdivision and horizontal development of the above-mentioned Properties located in Barangay Tumaga, City of Zamboanga, Island of Mindanao, into a residential subdivision, will not give rise to a taxable joint venture as provided under Section 22 (B), in relation to Section 27 (A), both of the National Internal Revenue Code (NIRC), as amended; HCTEDa The allocation of saleable units between FLI and TADTI in consideration of their respective contributions, to be stipulated in the Development Agreement, is not a taxable event and is not subject to income tax, and subsequently to withholding tax, and value-added tax (VAT), since the allocation of saleable units is in fact a mere return of capital that each has contributed; The Partition Agreement whereby FLI and TADTI shall allocate unto each other their share in the saleable units in consideration of their respective contributions, is not subject to the documentary stamp tax (DST) imposed under Section 196 of the NIRC, as amended, nor to any income tax, and consequently withholding tax, since the allocation is made without monetary consideration and is not in connection with a sale. Rather, the partition is made merely to segregate the saleable units between the parties, as the return of the capital which each contributed. However, it is understood that should FLI and TADTI sell any of the saleable units 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 27 (A) of the NIRC, as amended, and consequently to withholding tax as implemented under Revenue Regulations (RR) No. 2-98, as amended. It is represented that FLI is a corporation duly organized and existing under the laws of the Republic of the Philippines, engaged in the business of acquiring, developing and selling real estate, including residential subdivisions and residential/commercial buildings; that TADTI is a corporation duly organized and existing under the laws of the Republic of the Philippines; that it is the absolute and registered owner of a parcel of land located in Barrio Tumaga, Zamboanga City, Mindanao, with an aggregate total area of ONE HUNDRED TWENTY-ONE THOUSAND TWO HUNDRED TWENTY-NINE (121,229) Square Meters, more or less, specifically covered by Transfer Certificate of Title (TCT) No. T-213621; that on April 7, 2009, FLI, as the developer, entered into a Development Agreement with TADTI for the vertical development of the above-mentioned real property; and that salient portions of the Development Agreement are as follows: 1. FLI shall undertake, cause, oversee, coordinate and manage the performance of all the necessary work for the purpose of constructing, developing, and completing the development of the subject real property, which development shall include improvements and facilities as agreed upon; 2. FLI shall shoulder all the equipment, engineering, materials, supplies and labor expenses incurred relative to the construction, development, and completion of the development of the subject real property; 3. For and in consideration of the development obligations and undertakings it will assume, FLI will receive Sixty percent (60%) of the saleable units within the projected land area resulting from said development. The remaining Forty percent (40%) shall be for TADTI; TIEHSA 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. 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. 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 FLI (the Developer) and TADTI (the Landowner) 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. ETaHCD In view of the above, there will be no taxes involved in the event that TADTI transfers and assigns to FLI sixty percent (60%) of the resultant subdivided lots in return for the latter's cost of development. The allocation of saleable lots of the Project between FLI and TADTI 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 Memorandum of Sharing whereby FLI and TADTI 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. DCASEc 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. 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, 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 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. (BIR Ruling No. DA-373-2008 dated June 19, 2008) 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