G-Tech Development Corporation

September 18, 2008 BIR RULING [DA-(JV-030) 232-08] G-Tech Development Corporation Room 322 Verde Oro Building 535 Commonwealth Avenue Diliman, Quezon City Attention: Mr. Guido A. Ganhinhin Chief Executive Officer Gentlemen : This refers to your letter dated August 12, 2008 stating that the TH Realty, Inc. is a corporation duly organized and existing under the laws of the Philippines with principal office address at 466 Banawe Street, Quezon City; that on the other hand, G-Tech Development Corporation is likewise a corporation organized and existing under the laws of the Philippines; that TH Realty, Inc. is the absolute and registered owner of a parcel of land situated at Barangay Mawaque, Sapang Bayabas, Mabalacat, Pampanga with an aggregate area of 28,050 square meters covered by TCT No. 432654-R; that G-Tech Development Corporation is a subdivision developer with capacity, expertise and willingness to develop the said property; that on January 16, 2006, a Joint Venture Agreement (JVA) was entered into by TH Realty, Inc., as the Owner, and G-Tech Development Corporation, as the Developer, whereby the latter undertakes to develop the property into a first class residential subdivision and shall furnish all materials, equipment, manpower and services needed to implement the development works in accordance with the approved plans and specifications; and that the salient features of the JVA are as follows: 1. The Owner shall pay the Developer in the form of residential lot shares within the subdivision project constituting in aggregate fifty percent (50%) of the total saleable area. The lot shares of the Developer shall be selected on a five (5) to five (5) ratio on every ten (10) contiguous lots, with the Owner making the first choice of five (5) contiguous lots, to be followed by the Developer's five (5) contiguous lots, until the fifty percent (50%) lot shares due the Developer is selected; 2. The TCTs of the lot shares of the Developer shall already be registered in the name of the Developer, by the force and effect of a Deed of Assignment that the Owner shall execute for the purpose, when the individual TCTs are generated. However, the TCTs of the lot shares of the Developer shall remain with the Owner until due for release to the Developer. Proportionate number of TCTs representing the Developer's share shall be due for release to the Developer upon its completion of specific scope of work. Based on the foregoing representations, you now request for a ruling on the tax consequence of the JVA entered into by TH Realty, Inc. and G-Tech Development Corporation. aECSHI In reply thereto, please be informed that 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. 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 Owner 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 saleable 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 Assignment to be executed by the Parties whereby they allocate and distribute between them their respective shares in the Project in the form of saleable 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 27 (D) (5), 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. HEcIDa 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. 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