Filinvest Land, Inc.

December 8, 2009 BIR RULING [DA-(JV-038) 745-09] Sec. 22; Joint Venture; DA (JV-055) 557-2008; DA (JV-020) 537-2009 Filinvest Land, Inc. 173 P. Gomez Street San Juan, Metro Manila Attention: Atty. Andrew James Gerard D. Ruiz Tax Counsel Gentlemen : This refers to your letter dated May 3, 2007, requesting confirmation of the various tax consequences arising from a Joint Venture Agreement for construction purposes, between Filinvest Land, Inc. and GCK Realty Corporation. It is represented that Filinvest Land, Inc. ("FLI" for brevity) is a corporation duly organized and existing under the laws of the Republic of the Philippines, engaged in the business of acquiring, developing, selling, mortgaging, exchanging and leasing real estate of all kinds, including, among others, residential subdivisions. On the other hand, GCK Realty Corporation ("GCKRC" for brevity), is a corporation duly organized and existing under the laws of the Republic of the Philippines, and is the absolute and registered owner of seven (7) parcels of land located in Barrio Camputhaw, Cebu City, specifically Lot Nos. 6, 6, 1, 2, 4, 5 and 7, covered by Transfer Certificates of Title (TCT) Nos. T-127457, T-127458, T-127459, T-127460, T-127461, T-127462, T-127463, with an aggregate area of 4,211 square meters (m 2 ), more or less (hereinafter collectively referred to as the "Properties"). IcAaEH On January 22, 2007, FLI, as the developer, agreed to undertake a joint venture with GCKRC for the vertical development of the real property abovementioned. GCKRC would contribute the abovementioned real properties to the joint venture undertaking, while FLI would undertake to develop said real properties. The salient portions of the joint venture are as follows: 1. FLI shall undertake the construction of a medium rise condominium building on the subject real property, which development shall include improvements and facilities as agreed upon; 2. FLI shall shoulder all the equipment, engineering, materials, supplies and labor expenses incurred relative to the construction of a medium rise condominium building on the subject real property; 3. For and in consideration of the development obligations and undertakings it will assume, FLI will receive Ninety Two percent (92%) of the saleable units which shall result from said construction of a medium rise condominium building on the subject real property. The remaining Eight percent (8%) shall be allocated to GCKRC; In view of the foregoing, you are requesting confirmation of your opinion as follows: 1. The Development Agreement between FLI and GCKRC, for the construction of a medium rise building on the subject real property located in Barrio Camputhaw, Cebu City, will not give rise to a taxable joint venture as provided under Section 22 (B), in relation to Section 27 (A), both of the National Internal Revenue Code (NIRC), as amended; 2. The allocation of saleable units between FLI and GCKRC in consideration of their respective contributions, as stipulated in the Development Agreement, is not a taxable event and is not subject to income tax, and subsequently withholding tax, and the Value-Added Tax (VAT), since the allocation of saleable units is in fact a mere return of capital that each has contributed; CAHTIS 3. The Partition Agreement, and the Deed of Lot Allocation whereby FLI and GCKRC will allocate unto each other their share in the saleable units in consideration of their respective contributions, shall not be subject to the Documentary Stamp Tax (DST) imposed under Section 196 of the NIRC, as amended, nor to any income tax, and consequently withholding tax, since the allocation will be made without monetary consideration and will not be in connection with a sale. Rather, the partition will be made merely to segregate the saleable units between the parties, as the return of the capital which each contributed. However, it is understood that should FLI and/or GCKRC sell any of the saleable units allocated to them, to third parties, the gain that may be realized from said sale will be subject to regular (corporate) income tax at 35%, in accordance with Section 27 (A) of the NIRC, as amended, and consequently to withholding tax as implemented under Revenue Regulations (RR) No. 2-98, as amended. 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." (Underscoring 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 Development Agreement entered into by and between FLI and GCKRC is not subject to the income tax under Section 27 (A) of the Tax Code of 1997, as amended. (BIR Ruling No. DA-694-07 dated December 28, 2007; BIR Ruling No. 693-07 dated December 28, 2007) Moreover, the allocation of the saleable lots between FLI and GCKRC, which is done effectively in consideration of their respective contributions, does not constitute a taxable event, as no income is actually realized by either FLI and/or GCKRC. The Partition Agreement or Deed of Allocation will be executed 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) . FLI and GCKRC, 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 Partition Agreement is not subject to income tax, and consequently, to withholding tax. ETDSAc 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 parcels of land, GCKRC 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). FLI and/or GCKRC 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 FLI and/or GCKRC, would be subject to regular (corporate) income tax at the rate of 35%, (reduced to 30% effective January 1, 2009) 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 FLI and/or GCKRC to third parties would likewise be subject to the VAT at the rate of 12%, in accordance with Section 106 of the 1997 Tax Code, as amended. However, the sale of said saleable units may be exempted from VAT in accordance with Section 109 (P) of the same Tax Code. Further, said sales would be subject 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 Partition Agreement or Deed of Allocation whereby FLI and GCKRC will allocate unto each other their share 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 FLI and GCKRC, no DST therefore is due and collectible on said Partition Agreement or Deed of Allocation. However, the notarial acknowledgment to said Partition Agreement or Deed of Allocation shall be subject to the DST pursuant to Section 188 of the 1997 Tax Code, as amended, in the amount of P15.00. EHCaDS Finally, this ruling authorizes the Revenue District Officer of the revenue district where the property is located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the transfer of the titles to the lots to be received by FLI and GCKRC based on their respective allocations pursuant to the partition without need of presentation of proof of payment of the capital gains tax or the creditable withholding tax, documentary stamp tax and value-added tax and/or donor's tax. Provided, however, that the parties to the joint venture shall cause the Register of Deeds to annotate on the TCTs involved that a development project is being undertaken on the lands and is the object of the joint venture between the parties, and that the afore-stated joint venture is held to be a tax-exempt entity pursuant to this Ruling issued by this Office. Provided further, that the 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 Deed of Partition. 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 (JV-055) 557-2008 dated December 19, 2008) Finally, since under the Joint Venture Agreement FLI undertakes to market and administer the saleable lots allocated to the landowner, the marketing and administrative fees derived by FLI 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. [BIR Ruling No. DA (JV-020) 537-2009 dated September 14, 2009] 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.) GREGORIO V. CABANTAC Deputy Commissioner