Palmstar Realty & Development Corp.

November 7, 2008 BIR RULING [DA-(JV-042) 398-08] Section 22 (B); DA-450-2004 Palmstar Realty & Development Corp. No. 10 18th Avenue, Murphy Cubao, Quezon City Attention: Engr. Fernando Lim Go, Jr. President Gentlemen : This refers to your letter dated July 25, 2008 requesting a confirmatory ruling to the effect that the Memorandum of Agreement (MOA)/Joint Venture Agreement (JVA) between Palmstar Realty & Development Corp. and the landowner, Mr. Fernando Lu Go, will have the following tax consequences: 1. The JVA will not create a separate taxable joint-venture within the meaning of Section 22 (B), in relation to Section 27 (A) of the Tax Code of 1997, as amended; and 2. Since the JVA will not create a separate taxable joint-venture, the subsequent division and allocation of ownership of the developed property between the parties will not be subject to income tax. It is represented that Palmstar Realty & Development Corp. (Company), a corporation duly organized and existing under the laws of the Philippines with principal office address at No. 10, 18th Avenue, Murphy, Cubao, Quezon City is engaged in the construction and real estate development; that the Company is registered in Securities and Exchange Commission on November 8, 2006 with SEC Reg. No. CS2006-17485; that it is also registered with the Bureau of Internal Revenue with TIN 006-538-223-000; that the Company entered into a Memorandum of Agreement (MOA) dated June 17, 2008 with Mr. Fernando Lu Go with residential address at No. 16, Data St., Brgy. Don Manuel, Quezon City; that under the MOA, the parties agreed to undertake the construction of a multi-storey residential/commercial condominium (Project); that both parties to the MOA agreed that specifically designated condominium units and parking slots in the Project shall be allocated in separate legal ownership between the parties in the proportion that their respective contributions to the Project bear to the total cost of the Project; and that under paragraph 4 of the MOA, the parties have to the allocation of condominium units and parking lots as follows: 4. ALLOCATION OF CONDOMINIUM UNITS AND PARKING SLOTS. In consideration of and as a return on each of the parties respective contributions to the Project, specifically designated condominium units and parking slots in the Project shall be allocated in separate legal ownership between the Parties in accordance with the following sharing scheme: FIRST PARTY shall be entitled to thirty five percent (35%) of the developed saleable condominium units/parking slots in the Project and SECOND PARTY shall be entitled to sixty five percent (65%) of the developed saleable condominium units/parking slots in the Project. TSIDEa In reply, please be informed as follows: 1. Pursuant to Section 22 (B) of the NIRC, as amended, 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. 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 no be considered an additional income tax lien. Considering the clear provision of Section 22 (B) which clearly 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 between Palmstar Realty & Development Corp. and the landowners, Mr. Fernando Lu Go is not a corporation subject to corporate income tax. However, for VAT purposes, the joint venture (or consortium) is by itself a taxable entity. Moreover, the contribution of each of the parties to the joint venture is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax since the parties did not convey or transfer any ownership or interest when they contributed to the joint venture but merely pooled their resources to a common fund. The said contributions constitute their capital contribution to the joint venture project. The transfers are also not subject to value-added tax (VAT), since the transfers are not in the course of business but capital contributions. 2. The allocation of saleable lots of the Project between Palmstar Realty & Development Corp. and the landowner, Mr. Fernando Lu Go in consideration of their respective contributions 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 party has contributed. The MOA whereby Palmstar Realty & Development Corp. and Mr. Fernando Lu Go will allocate unto each other their share in the saleable area in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 of the NIRC, 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 contributed. However, the acknowledgment to said Agreement is subject to the documentary stamp tax pursuant to Section 188 of the NIRC, as amended. However, 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 regular income tax rate under Section 27 (A) of the NIRC, as amended and to the creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR 6-2001. Moreover, said sale shall be subject to the documentary stamp tax imposed under Section 196 of the NIRC, as amended based on the gross selling price or fair market value of the properties whichever is higher. Likewise, the said sale shall be subject to VAT. 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 Memorandum of Agreement, 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 ratio 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. 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. ITESAc Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service