Casimiro Development Corporation

December 22, 2009 BIR RULING [DA-(JV-040) 812-09] Sec. 22 (B); DA(JV-039)752-2009 dtd. 12/08/09 Casimiro Development Corporation 2nd Floor Casimiro Building, Alabang-Zapote Road Zapote, Las Pias City Attention: Teofilo P. Casimiro President Gentlemen : This refers to your letter dated December 07, 2009, requesting confirmation of the various tax consequences arising from a Joint Venture Agreement for construction/land and site development purposes, between Casimiro Development Corporation and Gregorio Agro-Industrial, Inc. It is represented that Casimiro Development Corporation entered into a Joint Venture Agreement with Gregorio Agro-Industrial, Inc. for the land and site development and construction of housing units to be known as Woodcrest located at Brgy. Aniban, Bacoor, Cavite. Gregorio Agro-Industrial, Inc. will contribute the parcels of land situated at the above location with a total area of Twenty One Thousand Eighty Three (21,083) sq.m. covered by Transfer Certificate of Title No. T-80626 issued by the Office of the Register of Deeds for the Province of Cavite. Casimiro Development Corporation shall undertake at its own expenses the land and site development and the construction of housing units. In return for their respective contribution to the project, Casimiro Development Corporation and Gregorio Agro-Industrial, Inc. will acquire separate ownership of specific designated units as specified in the Subdivision Agreement. These units will later be offered for sale. 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: EHcaDT 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." (Emphasis 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 Casimiro Development Corporation and Gregorio Agro-Industrial, Inc. is not subject to the income tax under Section 27 (A) of the Tax Code of 1997, as amended. Moreover, the allocation of the saleable units between Casimiro Development Corporation and Gregorio Agro-Industrial, Inc., which is done effectively in consideration of their respective contributions, does not constitute a taxable event, as no income is actually realized by either Casimiro Development Corporation and Gregorio Agro-Industrial, Inc. 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). Casimiro Development Corporation and Gregorio Agro-Industrial, Inc., having contributed to the development of the aforementioned real properties, will not realize any income upon the allocation of the saleable units. Hence, the allocation of units arising from the Partition Agreement is not subject to income tax, and consequently, to withholding tax. 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, Gregorio Agro-Industrial, Inc. 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). IcAaSD Casimiro Development Corporation and/or Gregorio Agro-Industrial, Inc. will only realize income upon their respective sales of the saleable units allocated to each of them. In this regard, said sales to third parties, if ever undertaken by Casimiro Development Corporation and/or Gregorio Agro-Industrial, Inc., would be subject to regular (corporate) income tax at the rate of 30%, 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 Casimiro Development Corporation and/or Gregorio Agro-Industrial, Inc. to third parties would likewise be subject to the VAT at the rate of 12%, in accordance with Sections 106 and 109 of the 1997 Tax Code, as amended, and 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. Moreover, Casimiro Development Corporation shall have the exclusive right to sell Gregorio Agro-Industrial, Inc.'s share of developed saleable lots with or without housing components, at the option of Casimiro Development Corporation, at the selling price of Pesos: Eight Thousand Pesos (P8,000) per square meter of saleable land. These proceeds to be remitted to Gregorio Agro-Industrial, Inc. shall be net of Ten Percent (10%) of the sales value to cover the cost of marketing management services and Seven and One Half Percent (7.5%) for capital gains tax. Further, the Partition Agreement or Deed of Allocation whereby Casimiro Development Corporation and Gregorio Agro-Industrial, Inc. will allocate unto each other their share in the saleable units 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 Casimiro Development Corporation and Gregorio Agro-Industrial, Inc., 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. In connection with the above construction undertaking, the Joint Venture and the co-venturers are hereby required to register with the Revenue District Office (RDO) where their principal place of business is located. Moreover, 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 units to be received by Casimiro Development Corporation and Gregorio Agro-Industrial, Inc. 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. ADCSEa 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, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group