Sysco Development Corporation

September 5, 2008 BIR RULING [DA-(JV-026) 195-08] Sysco Development Corporation Project Services Department 2nd Floor, PARC House Building 227 EDSA, Mandaluyong City Attention: Mr. Rodelito H. Amo Project Services Department Head and Mr. James Y. Uy Vice President for Operations Gentlemen : This refers to your letter dated August 7, 2008 stating that Sysco Development Corporation (Developer) is a domestic corporation duly registered with the laws of the Philippines; that Crowntex Corporation (Landowner), is likewise a corporation organized and existing under the laws of the Philippines with office address at Crowntex Compound, E. Rodriguez Road, Barangay Sta. Rosa I, Marilao City, Bulacan City represented herein by its President Manuel I. Tinio and Reynaldo T. Ongsiako, as represented by its Attorney-in-Fact Manuel I. Tinio; that Crowntex Corporation is the absolute and registered owner of a parcel of land situated in Cabanatuan City with a total area of 40,000 square meters covered by TCT No. T-95453 issued by the Registry of Deeds for Cabanatuan City; that on the other hand, Reynaldo T. Ongsiako is likewise the absolute and registered owner of a parcel of land situated in Cabanatuan City with a total area of 39,000 square meters covered by TCT No. T-119954; that the parties have agreed to enter into a joint venture wherein the Landowner will contribute the subject properties to the joint venture and the Developer having the skills, expertise and track-record experience in the development of real estate and construction of residential units will undertake the subdivision and site development of the said properties; that on October 12, 2005, a Joint Venture Agreement (JVA) was entered into by the above-named parties; that the salient features of the JVA are as follows: 1. For and in consideration of the covenants and undertakings of the parties hereto, it is hereby agreed that the proceeds of the joint venture consisting of the developed lots shall be distributed between the parties, with the Landowner being entitled to Forty Percent (40%), and the Developer, Sixty Percent (60%) of the Net Saleable Area, which is hereby defined as the total area of subject property less the roads, open spaces, and other areas for the clubhouse, and other amenities for the Project. The particular lots to be allocated to the other party as its share of the joint venture proceeds shall be determined by mutual agreement of the parties and the list of the developed lots per block and phase assigned and allocated to each of the parties . . . . All such roads, open spaces and amenities shall be turned over to the Developer upon completion of the Project. Its maintenance and upkeep shall be for the account of the Developer prior to the turnover to the City Government. All real estate taxes pertaining to the road and open spaces shall be for the account of the Developer. 2. The parties mutually agree that the selling price of the developed lot per square meter shall be fixed by market forces, subject to a mutually agreed singular floor price per square meter, to be determined from time to time jointly by both parties, below which neither party shall sell their respective share of the lots of the Project. cDEHIC Based on the foregoing representations, you now request for confirmation of your opinion that 1. The terms of the JVA between the Landowner and the Developer do not give rise to a separate taxable joint venture pursuant to Section 22 (B) of the Tax Code of 1997; and 2. The allocation and distribution of residential units and developed lots to the Landowner and the Developer in the project pursuant to the JVA are not taxable events, and therefore, are not subject to income/creditable withholding tax, value-added tax (VAT) and documentary stamp tax (DST). 3. Finally, the corresponding issuance of the Certificate Authorizing Registration (CAR) by the Revenue District Office concerned so that title to the properties may now be registered in their respective names. In reply thereto, please be informed that your opinion is hereby confirmed 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. 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. TIAEac 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 the Landowner and the 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 on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. 2. The allocation and distribution of the respective shares of the Parties in the Project consisting of residential units and developed lots in consideration of their respective contributions, as stipulated in the JVA 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. Moreover, the Deed of Reconveyance to be executed by the Parties with the escrow agent whereby the latter will allocate and distribute between them their respective shares in the Project in the form of residential units and developed lots 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. 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 under Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001 or capital gains tax under Section 24 (D) (1), as the case may be. Moreover, such sale shall be subject to the documentary stamp tax 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. 3. This will authorize the Revenue District Officer (RDO) of the revenue district where the property is located to issue the corresponding Certificate Authorizing Registration (CAR) and Tax Clearance Certificate (TCL) involving the transfer of the title to the parties based on their respective allocations pursuant to the Deed of Partition, without need of 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 TCTs that a development project is being undertaken on the land and is the object of the development 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 development agreement. For this purpose, a compliance report of the project indicating the number of lots developed, the respective TCTs and the party in whose name the corresponding title was issued. (BIR Ruling No. DA-373-2008 dated June 19, 2008) 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. DHACES 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