Jamaica Realty and Marketing Corporation

October 16, 2008 BIR RULING [DA-(JV-036) 302-08] 22 (B); DA-373-2008; DA-126-2001 Jamaica Realty and Marketing Corporation 101 Aguirre Ave., B.F. Homes Paraaque City Attention: Ms. Mely P. Bejasa AVP-Marketing and Regional Director Gentlemen : This refers to your letter dated April 21, 2008 requesting for exemption from income tax and/or expanded withholding tax, value-added tax and documentary stamp tax on the development of a property in Barangay Batong Malaki, Los Baos, Laguna into a residential subdivision under a Memorandum of Agreement (MOA) by and between Jamaica Realty and Marketing Corporation (Jamaica Realty for brevity) and Atty. Victor C. Reyes. Documents submitted show that Atty. Victor C. Reyes is the registered owner of a parcel of land with an aggregate land area of forty six thousand one hundred eighty seven (46,187) sq.m., referred to as Lot No. 585, CAD-450, Los Baos Cadastre and described as the approved survey return no. AS-04-002297. A portion of which consisting of twenty three thousand ninety three (23,093) sq.m., more or less, will be developed into a residential subdivision to be known as "Rockville Subdivision" (the Project) by Jamaica Realty, a domestic corporation engaged in the business of developing similarly situated lands for sale to the general public by virtue of a MOA entered into by and between the above-mentioned parties. As a return of their respective contributions, the lots in said Project shall be allocated to Jamaica and Atty. Victor C. Reyes on 60%-40% basis, correspondingly, as evidenced by the execution of an Amendment to the MOA dated July 3, 2007. In reply, please be informed as follows: ACTIcS 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 Jamaica Realty and Atty. Victor C. Reyes 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 Jamaica Realty and Atty. Victor C. Reyes, 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 parcel of land, Atty. Victor C. Reyes, neither sells, barters, exchanges goods, property nor renders service to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001) cIaCTS The Deed of Assignment whereby Jamaica Realty and Atty. Victor C. Reyes 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 Deed of Assignment 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 RR No. 2-98, as amended by RR No. 6-2001 or capital gains tax under Sections 24 (D) (1) or 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 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 Assignment, 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 Amendment to the MOA. 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) HEScID This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service