Filinvest Land, Inc.

November 5, 2008 BIR RULING [DA-(JV-041) 389-08] Sec. 22; DA 520-07 Filinvest Land, Inc. 173 P. Gomez Street San Juan, Metro Manila Attention: Juan R. Bernardino, Jr. Tax Counsel Gentlemen : This refers to your letter dated September 3, 2008 requesting confirmation of the various tax consequences arising from a Joint Venture Agreement for construction purposes, between Filinvest Land, Inc. and Teresita B. Soliman. 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. Ms. Teresita B. Soliman ("Ms. Soliman" for brevity) is the absolute and registered owner of One Hundred Eleven (111) parcels of land located in Tarlac City, Province of Tarlac with an aggregate area of approximately 55,377 square meters, more or less (hereinafter collectively referred to as the "Properties"). On December 15, 2006, FLI, as the developer, entered into a Development Agreement with Ms. Soliman for the subdivision and horizontal development of the real property abovementioned. The salient portions of the Development Agreement are as follows: 1. FLI shall undertake the subdivision and horizontal development of 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 subdivision and horizontal development of the said real property; 3. For and in consideration of the development obligations and undertakings it will assume, FLI will receive Sixty-five percent (65%) of the saleable lots which shall result from said subdivision and horizontal development. The remaining Thirty-five percent (35%) shall be retained in ownership by Ms. Soliman; HSIaAT In view of the foregoing, you are requesting confirmation of your opinion as follows: 1. The Development Agreement between FLI and Ms. Soliman, for the subdivision and horizontal development of the abovementioned Properties located in Tarlac City, Province of Tarlac, into a residential subdivision, 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 lots between FLI and Ms. Soliman in consideration of their respective contributions, to be 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 lots is in fact a mere return of capital that each has contributed; 3. The Partition Agreement whereby FLI and Ms. Soliman shall allocate unto each other their share in the saleable lots in consideration of their respective contributions, is not subject to the Documentary Stamp Tax (DST) imposed under Section 196 of the Tax Code of 1997, as amended, nor to any income tax, and consequently withholding tax, since the allocation is made without monetary consideration and is not in connection with a sale. Rather, the partition is made merely to segregate the saleable lots between the parties, as the return of the capital which each contributed. However, it is understood that should FLI and/or Ms. Soliman sell any of the saleable lots 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 24 of the Tax Code of 1997, as amended, and consequently to withholding tax as implemented under Revenue Regulations (RR) No. 2-98, as amended. HIaTCc 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." (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. EcDTIH Such being the case, the Development Agreement entered into by and between FLI and Ms. Soliman 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 FLI and Ms. Soliman, 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 Ms. Soliman. 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 Ms. Soliman, both having contributed to the development of the aforementioned real property, did 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 NIRC, 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 its parcel of land, Ms. Soliman 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 Ms. Soliman 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, would be subject to regular (corporate) income tax at 35%, in accordance with Section 27 of the 1997 Tax Code, as amended, and consequently to withholding tax as implemented under Revenue Regulations (RR) No. 2-98, as amended. DaTICc Further, the Partition Agreement or Deed of Allocation whereby FLI and Ms. Soliman have allocated 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 was executed without consideration and was not in connection with a sale between FLI and Ms. Soliman, no DST therefore is due and collectible on said Partition Agreement. However, the notarial acknowledgment to said Partition Agreement shall be subject to the DST pursuant to Section 188 of the 1997 Tax Code, as amended, in the amount of P15.00. This will authorize the Revenue District Officer (RDO) of the revenue district where the properties are 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 Partition, without need of the presentation of proof of payment of the creditable 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 Transfer Certificate/s of Title that a development project is being undertaken on the land and is the object of the Joint Venture Agreement between the parties, and that the 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 developed/saleable lots/units in accordance with the allocation ration in the Joint Venture Agreement. For this purpose, a compliance report of the project indicating the number of lots/units developed/built, respective TCTs/CCTs and the party in whose name the corresponding title was issued shall be submitted. AECacT 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