Dizon Land Realty and Dev't. Corp.

November 6, 2009 BIR RULING [DA-(JV-027) 653-09] Sec. 22; Joint Venture; DA (JV-020) 537-2009 Dizon Land Realty and Dev't. Corp. Angeles-Magalang Road, Pandan Angeles City Attention: Ms. Lynette Lansangan Office Administrator Gentlemen : This refers to your letter dated August 8, 2009 requesting, in effect, for a ruling that the distribution or allocation to the co-venturers of their respective shares in the development project is exempted from the payment of income, capital gains and documentary stamp taxes imposed under Sections 27 (A), 27 (D) (5) and 196, respectively, all of the Tax Code of 1997, as amended. It is represented that KEMMP Realty Corp., the registered owner of a parcel of land with an aggregate area of 22,000 sq. m., more or less, covered by Transfer Certificate of Title No. 607447-R, situated at San Agustin, San Fernando, Pampanga, entered into a Joint Venture Agreement with Dizon Land Realty and Dev't. Corp. (the Developer) on February 5, 2009, to develop and partition the 16,714 sq. m. area thereof, and convert the same into a residential subdivision. The landowner agreed to share with the Developer on a 57.5%-42.5% ratio of the saleable lots after the completion of the subdivision/development project. 57.5% for the developer and 42.5% for the landowner. The developer shall execute the corresponding Partition Agreement with the landowner, for purposes of implementing the distribution of the saleable lots without any monetary consideration. The landowner appointed the developer as its exclusive marketing agent/broker to handle the selling, marketing, documentation, promotion, and advertisement of its shares in the joint venture project. In reply, please be informed as follows: Section 22 (B) of the Tax Code of 1997, as amended, states as follows: "Section 22. Definitions. When used in this Title: xxx xxx xxx (B) The term 'corporation' shall include partnerships, 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. 'General professional partnerships' are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business." (Emphasis supplied) The abovementioned exemption was initiated under Presidential Decree (PD) No. 929, dated May 4, 1976, which amended the definition of a "taxable" corporation in the Tax Code, as amended, to specifically exclude joint ventures formed for the purpose of undertaking construction projects. Said PD instituted the amendment of the definition of the term "taxable" corporation in recognition of the following situations: (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 local contractors to enter into joint ventures to pool, their limited resources in undertaking big construction projects. Hence, to assist the local contractors in achieving competitiveness with foreign contractors, the joint ventures formed by said local contractors were thus deemed as not falling under the definition of a "taxable" corporation, and thus not subject to income tax. This was, and still is, the intention of the legislature. Such being the case, the Joint Venture Agreement entered into by Dizon Land Realty and Dev't. Corp. with the landowner, KEMMP Realty Corp., is not subject to the income tax imposed under Section 27 (A) of the Tax Code of 1997, as amended. Moreover, the allocation of the saleable lots between Dizon Land Realty and Dev't. Corp. and the landowner, which is done effectively in consideration of their respective contributions, does not constitute a taxable event, as no income is actually realized by either the developer and/or the landowner. The partition or allocation will be made without consideration, and will not be in connection with any sale between the said parties. As has been ruled by the BIR on numerous occasions, income, in a broad sense, means all wealth which flows into the taxpayer other than as a mere return of capital (Section 36, RR No. 2). The developer and the landowner, having contributed to the development of the aforementioned real properties, will not realize any income upon the allocation of the saleable lots. Hence, the allocation of lots arising from the Joint Venture Agreement executed by the above parties is not subject to capital gains tax, income tax, and consequently, to withholding tax. The said allocation, likewise, is not subject to VAT. Under Section 105 of the 1997 Tax Code, as amended, 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. However, by contributing the above parcel of land, the landowner neither sells, barters, exchanges goods, property nor renders services to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001; BIR Ruling No. DA-115-2001 dated September 5, 2001). aHTCIc The developer and the landowner will only realize income upon their respective sales of the saleable lots allocated to each of them. In this regard, said sales to third parties, if ever undertaken by the developer and/or the landowners, would be subject to regular income tax at the rate of 35%, in accordance with Section 27 (A) of the 1997 Tax Code, as amended, and consequently to withholding tax as implemented under Revenue Regulations (RR) No. 2-98, as amended. The said sales by the developer and/or the landowner to third parties would likewise be subject to the VAT at the rate of 12%, in accordance with Sections 106 and 109 of the 1997 Tax Code, as amended, and to the Documentary Stamp Tax (DST) at the rate fifteen pesos (P15.00) for each one thousand pesos (P1,000.00), or fractional part thereof in excess of one thousand pesos (P1,000.00) of such consideration or value, in accordance with Section 196 of the 1997 Tax Code, as amended. Further, the corresponding Partition Agreement that will be executed by the developer with the landowner, whereby the developer and the landowner allocate unto each other their corresponding shares in the saleable lots in consideration of their respective contributions, is not subject to the DST imposed under Section 196 of the 1997 Tax Code, as amended, considering that, as stated earlier, the allocation is made without monetary consideration and is not in connection with a sale. In this regard, Section 185 of the Revised Documentary Stamp Tax Regulations (Regulations No. 26)provides that "conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable". Accordingly, since the aforementioned Partition Agreement will be executed without consideration and not in connection with a sale between Dizon Land Realty and Dev't. Corp. and the landowner, no DST therefore is due and collectible on said Partition Agreement. However, the notarial acknowledgment to said Partition Agreement shall be subject to the DST pursuant to Section 188 of the 1997 Tax Code, as amended, in the amount of P15.00. 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 titles to the parties based on their respective allocations pursuant to the Deed of Partition/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/units in accordance with the allocation ration 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. Finally, since under the Joint Venture Agreement the developer undertakes to market the saleable lots allocated to the landowner by virtue of an exclusive marketing agreement, the marketing fees derived by the developer thereof shall be subject to income tax imposed under Section 27 (A) of the Tax Code of 1997, as amended, and consequently, to the withholding tax imposed under Revenue Regulations No. 2-98, as amended, and to the VAT imposed under Section 108 of the same Tax Code. 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. AHcCDI Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner