MRO Development Corporation

November 19, 2009 BIR RULING [DA-(JV-031) 682-09] 22 (B); DA-373-2008 MRO Development Corporation 21 Paseo Annabelle, Ma. Luisa Estate Park Banilad, Cebu City Attention: Ms. Annabelle O. Aboitiz General Manager Gentlemen : This refers to your letter dated November 18, 2008 requesting for an opinion on the exemption from payment of capital gains tax and documentary stamp tax on the development of several properties under a joint venture arrangement. Documents submitted show that the Province of Cebu (Landowner) is the registered and absolute owner of two (2) parcels of land, known as Lot Nos. 1187 and 1200 (Subject Properties) situated at Busay, Cebu City, which are contiguous to Maria Luisa Estate Park developed by MRO Development Corporation (MRO for brevity). The Landowner, through its Economic Enterprise Council (EEC), invited through a Notice/Invitation to the Public, interested parties to submit proposals to develop some of its properties in Cebu (Project), among which are the Subject Properties. In response to the said Notice/Invitation, MRO, a well-known and prestigious real estate developer in Cebu, submitted a proposal to develop the afore-mentioned properties into a residential subdivision. On October 19, 2007, the Landowner through its EEC, after much discussions and negotiations, found the said proposal of MRO to be advantageous to its interests and recommended to the Cebu Sangguniang Panlalawigan to approve its findings and to authorize Hon. Gwendolyn F. Garcia, Cebu Provincial Governor, to sign and execute the Joint Venture Agreement (JVA) for said purpose. The Cebu Sangguniang Panlalawigan, through Resolution No. 4022-2007 has approved the said recommendation of the EEC and has authorized Gov. Gwendolyn F. Garcia to execute and sign the JVA relative thereto on November 8, 2007. For and in consideration of the development efforts of MRO, the Landowner as per their agreement, assigns to MRO sixty percent (60%) of the total saleable lots and the remaining forty percent (40%) thereof shall be the share of the Landowner. IDCcEa In reply, please be informed as follows: 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. P.D. No. 929 amended the definition of the taxable corporation so 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 Sec. 22 (B) which 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, this Office hereby confirms your opinion that the joint venture of the Landowner and MRO is not a corporation subject to corporate income tax. However, for VAT purposes, the joint venture (or consortium) is by itself a taxable entity. (BIR Ruling No. DA-373-2008 dated June 19, 2008) The allocation of the lots in the Project between the Landowner and MRO, in consideration of their respective contributions, as stipulated in their agreement 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 has contributed. (BIR Ruling No. DA-192-2001 dated October 17, 2001) The transfer is also not subject to VAT since under Section 105 of the Tax Code of 1997, any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders service and any person who imports goods shall be subject to VAT imposed in Sections 106 to 108 of the same Tax Code, as amended. Hence, by contributing its parcels of land, the Landowner, neither sells, barters, exchanges goods, property nor renders service to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001) DHACES The Partition Agreement of the Consolidated-Subdivided Lot Nos. 1187 and 1200 whereby the Landowner and MRO will allocate unto each other their shares in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, 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 has contributed. However, the acknowledgment to said Partition Agreement of the Consolidated-Subdivided Lot Nos. 1187 and 1200 is subject to the documentary stamp tax pursuant to Section 188 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 expanded 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. 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) and Tax Clearance Certificate (TCL) involving the transfer of the titles to the parties based on their respective allocations pursuant to the Partition Agreement of the Consolidated-Subdivided Lot Nos. 1187 and 1200, without need of the presentation of proof of payment of the expanded 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 TCT that a development project is being undertaken on the land and is the object of the joint venture between the parties, and that the aforestated 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 lots in accordance with the allocation ratio in the JVA. For this purpose, a compliance report of the project indicating the number of lots developed/built, the respective TCTs 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 and on the presumption that the JVA is valid and legal. However, if upon investigation, it will be ascertained that the facts and representation are different, then this ruling shall be considered as null and void. Very truly yours, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner