Megaworld Corporation

November 3, 2008 BIR RULING [DA-(JV-040) 381-08] 22 (B); DA-373-2008 Megaworld Corporation 28/F The World Centre 330 Sen Gil Puyat Ave. Makati City Attention: Atty. Monica T. Salomon First Vice-President Corporate Management Department Gentlemen : This refers to your letter dated July 15, 2008 stating that Megaworld Corporation (Megaworld) and Everland Estate Development Corporation (Everland) entered into a joint venture for the development of a parcel of land located in San Juan City, into a residential condominium project (the Project). The terms and conditions relating to the Project are embodied in a Joint Venture Agreement (JVA) dated March 19, 2008. In this connection, you now request for confirmation of opinion that: (i) The joint venture between Megaworld and Everland as embodied in the JVA is not subject to any tax under the Tax Code of 1997; (ii) The JVA is not subject to any tax under the 1997 Tax Code other than the Documentary Stamp Tax (DST) of Php15.00 imposed on the notarial acknowledgement; (iii) No value-added tax (VAT), income tax and DST under the Tax Code is due on the issuance of Condominium Certificates of Title (CCTs) covering the respective condominium units and parking slots allocated and distributed in consideration of the respective contributions of Megaworld and Everland in the Project pursuant to the JVA. Hence, upon presentment of proof of payment of the PhP15.00 DST imposed on the notarial acknowledgment, the Registry of Deeds for San Juan is thereafter authorized to: (a) annotate the JVA or excerpts thereof on the back of Transfer Certificate of Title (TCT) No. 3800-R issued by it, and (b) issue the CCTs covering the respective condominium units and parking lots of the Project in the names of Megaworld and Everland pursuant to the JVA; and AEIDTc (iv) No VAT, income tax and DST under the Tax Code of 1997 is due on the transfer of the land on which the Project will stand to a condominium corporation to be organized pursuant to the JVA. The facts as you represented are as follows: Megaworld is a corporation involved in property development, duly organized and existing under the laws of the Republic of the Philippines. Everland is likewise a corporation duly organized under and by virtue of the laws of the Philippines and is the registered owner of a parcel of land situated at San Juan City (the Subject Lot) with a total area of 3,826 square meters, more or less, and covered by TCT No. 3800-R issued by the Registry of Deeds for San Juan. Megaworld and Everland entered into a JVA for the construction of the Project on the Subject Lot. Under the provisions of the JVA, Everland shall contribute the Subject Lot to the Project while Megaworld shall be responsible for the planning, conceptualization, design, construction, monitoring, supervision, development and marketing, and will provide the funding to finance the cost of construction of the Project and for the constitution and establishment of such as a condominium project. Furthermore, upon the terms of the JVA, the parties shall allocate among themselves specific condominium units and parking spaces in the Project as a return of the contributions made by the parties. The parties have agreed that title to the specific condominium units and parking spaces allocated to each party shall be directly issued and registered under the names of the respective parties. Likewise, after the formation and organization of the condominium corporation, Everland shall transfer the Subject Lot to the condominium corporation as part of the common areas of the Project, for the common management and benefit of the members of the condominium corporation. The conveyance of the Subject Lot by Everland in favor of the condominium corporation will be made without consideration and solely for the purpose of complying with the provisions of Republic Act No. 4726, as amended, otherwise known as the "Condominium Act". DTEAHI The parties intend to have the JVA or excerpts thereof annotated at the back of TCT No. 3800-R issued by the Registry of Deeds for San Juan, which title covers the Subject Lot in order to serve notice to and bind third parties as to the existence of the JVA and the concomitant obligations of the parties. However, the JVA will not by itself transfer title over the Subject Lot as this shall take place only when the condominium corporation is formed and organized, and the Subject Lot is transferred to the said condominium corporation as part of the common areas. 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. cCaEDA 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 Megaworld and Everland 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) TcIaHC The allocation of the condominium units and parking spaces in the Project between Megaworld and Everland, in consideration of their respective contributions, as stipulated in the JVA 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, Everland, neither sells, barters, exchanges goods, property nor renders service to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001) IDSEAH The Partition Agreement whereby Megaworld and Everland 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 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 creditable withholding tax under 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 DST 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. Furthermore, no VAT, income tax and DST under the 1997 Tax Code is due on the transfer of the land on which the Project will stand to a condominium corporation to be organized pursuant to the JVA because the transfer of title over the Subject Lot from Everland to the condominium corporation will be made without monetary consideration. The purpose of the transfer is to comply with the requirements of the Condominium Act which mandates that the condominium corporation hold title to the common areas (including the land) for the benefit of the unit owners. Since Everland will not transfer the Subject Lot pursuant to a sale transaction no income will be generated thereby. CcHDaA 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 Partition Agreement, without need of the presentation of proof of payment of the creditable withholding tax, VAT and the corresponding DST. 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 condominium units and parking spaces in accordance with the allocation ratio in the JVA. For this purpose, a compliance report of the project indicating the number of units developed/built, the respective CCTs 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. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. AEDHST Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service