E. L. Punsalan and Associates Certified Public Accountants

November 3, 2008 BIR RULING [DA-(JV-038) 378-08] PD 929; 22 (B); DA-062-2002; DA-117-2002 E. L. Punsalan and Associates Certified Public Accountants G-104, Medical Plaza Makati, Amorsolo cor. Dela Rosa Sts. Legaspi Village, Makati City Attention: Atty. Eranio L. Punsalan Gentlemen : This refers to your letter dated October 24, 2008 stating that your clients, Gil Palacio and Co., Inc., Ojos de Agua Corp., GNEC Land Realty, Inc. and Dio Ap Corp., on November 17, 2004 entered into a Joint Venture Agreement (MOA) as Landowners, with Landco Pacific Corporation (Landco), as the Developer. Background: On December 22, 2004, the Bureau of Internal Revenue already issued BIR Ruling No. DA-656-2004 granting exemption to the aforesaid Joint Venture, as follows: 1. The joint venture by and between the Landowners and Landco is not subject to income tax under Section 27 of the Tax Code of 1997. 2. The assignment by the Landowners to LANDCO of their corresponding shares in the aforesaid project is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax, because the above-stated assignment is a transaction to effect its capital contribution, and therefore not a taxable event. ( BIR Ruling No. DA-192-2001 dated October 17, 2001 ) 3. The Partition Agreement whereby the Landowners and LANDCO will allocate unto each other their share in the Net Project Proceeds, in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 because the allocation is made without monetary consideration and is not in connection with a sale. The allocation is made merely to segregate the Net Project Proceeds between the parties, as the return of the capital which each has contributed. However, the acknowledgement to said Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. ( BIR Ruling No. DA-240-2001 dated November 16, 2001 ) 4. 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 services and any person who imports goods shall be subject to VAT imposed in Sections 106 to 108 of the same Tax Code. Hence, by contributing their parcels of land, the Landowners, neither sell, barter, exchange goods, properties nor render 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 ) 5. It is understood however, that upon the 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), whichever is applicable. Moreover, such sale shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, 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 year 2008, your clients, Gil Palacio and Co., Inc., Ojos de Agua Corp., GNEC Land Realty, Inc. and Dio Ap Corp., as Landowners and Landco, as the Developer, opted to put up a new corporation to be known as Playa Calatagan Landholdings, Inc. ("PCLI"), maintaining substantially the concept of developing the land. Both parties in the MOA, the Landowners and Developer, agreed to segregate from the aggregate land area of 14.9 hectares, a small parcel of land comprised of 2.2052 hectares to be used to capitalize PCLI. The ratio will be the same with that in the MOA, i.e., 40% to the Landowners and 60% to the Developer. The stockholdings will follow strictly the Partition Agreement between the Landowners and the Developers, based on the said MOA. PCLI will be used as corporate vehicle to develop the area for leisure and recreation activities, accommodation, food and beverage outlets, retail shops and stores, service outlets and other similar uses. Based on the foregoing facts and circumstances, you now request for confirmation of your opinion that the segregation of the 2.2052 hectares from the rest of the Joint Venture project, in order to capitalize the formation of PCLI based on the Partition Agreement in the existing MOA between the Landowners and Developer, is exempt from capital gains tax, income tax and value-added tax, pursuant to BIR Ruling No. DA-656-2004 dated December 22, 2004. In reply, please be informed that since the joint venture between Gil Palacio and Co., Inc., Ojos de Agua Corp., GNEC Land Realty, Inc. and Dio Ap Corp., as Landowners and Landco, as the Developer have already been confirmed by this Office as a tax-exempt joint venture, it necessarily follows that the segregation of the 2.2052 hectares from the rest of the joint venture project for the purpose of capitalizing a new corporation, which is also pursuant to the Partition Agreement embodied in the existing MOA, this Office is of the opinion that said segregation is exempt from the following taxes, to wit: 1. Pursuant to Section 22 (B) of the Tax Code of 1997, as amended, the term "corporation" includes 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. P.D. No. 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 as additional income tax lien. Considering therefore, 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 hereby opines that the segregation of the aforementioned 2.2052 hectares from the rest of the joint venture project, pursuant to the Partition Agreement embodied in the existing MOA, is not subject to income tax and/or capital gains under Section 27 of the Tax Code of 1997, as amended. 2. The segregation aforementioned is also not subject to VAT since under Section 105 of the Tax Code of 1997, as amended by R.A. 9337, any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services and any person who import goods shall be subject to VAT imposed in Sections 106 to 108 of the same Tax Code. Hence, by segregating the said 2.2052 hectares from the rest of the project, it is in effect, contributing the said parcel of land as investment to PCLI and said capitalization is not tantamount to a sale, barter, exchange of goods, property nor renders services to be subject to VAT. Hence, the transfer is not subject to VAT, since the transfer is not in the course of business but a capital contribution. ( BIR Ruling No. DA-240-2001 dated November 16, 2001; BIR Ruling No. DA-115-2001 dated September 5, 2001 ) Inasmuch as the Landowners did not cede their ownership or interest over their parcels of land when they contributed a portion of their landholdings to PCLI for the reason that the above-mentioned transfer is merely pooling of resources to a common fund, said transfer is likewise not subject to documentary stamp tax. It is understood however, that upon the subsequent disposition by the co-venturers of the net project proceeds 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. 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 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service