Atty. Norman Jacinto P. Doral

November 27, 2008 BIR RULING [DA-(JV-044) 472-08] 22 (B); DA-373-2008 Atty. Norman Jacinto P. Doral 766 Josefina St. Sampaloc, Manila Gentlemen : This refers to your letter dated May 26, 2008 stating that Brentwood Realty Development Corporation, Johnny S. Lim, Francis S. Lim, Jerome S. Lim, Evelyn Lim, Heirs of Yu Te and So Phick Lian, Central Luzon Mahogany Corporation, Philippine Union Realty and Development Corporation, Pacific Orient Realty Development Corporation and San Jose Lumber and Hardware, Inc. (collectively the Landowners) entered into a Joint Venture Agreement (JVA) with Sta. Lucia Realty and Development, Inc. (SLRDI), for the development of their 319,678 sq.m. property, into a residential subdivision (the Project) with a sharing of 50-50 for the proceeds of the saleable area of the Project. The subject property is covered by Transfer Certificates of Title (TCT) Nos. 105530, 105529, 104415, 104414 and T-34180 located in Tanauan, Batangas. In accordance with the JVA, SLRDI has caused the development of the property and the project is now in the process of segregation and transfer of the corresponding share of SLRDI constituting 50% of the net saleable area. You now request for all opinion on the tax consequences of the following transactions: CTHDcS 1. What would be the taxes involved when the Landowners transfer to SLRDI, its 50% share in the sales proceeds of the total saleable lots for its development of the project? Would there be capital gains and documentary stamp taxes? 2. What would be the taxes involved when the parties eventually sell their respective share of saleable lots to third party? 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. 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 by and among SLRDI and the Landowners is not a corporation subject to corporate income tax. However, for VAT purposes, the joint venture (or consortium) is by itself a taxable entity. The allocation of the shares in the Project among SLRDI and the Landowners, in consideration of their respective contributions, as stipulated in their 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. 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 their parcels of land, the Landowners, neither sell, barter, exchange goods, property nor renders service to be subject to VAT. The Memorandum of Sharing whereby SLRDI and the Landowners 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 share of the parties, as the return of the capital which each has contributed. However, the acknowledgmnent to said Memorandum of Sharing is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997, as amended. IDCHTE It is understood however, that upon subsequent disposition by the co-venturers of their corresponding shares, the gain that may be realized by them from such sale will be subject to the expanded withholding tax under RR No. 2-98, as amended by RR No. 6-2001 or capital gains tax under Sections 24 (D) (1) and 27 (D) (5), as the case may be. Moreover, such sale shall be subject to the documentary stamp tax 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. 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 pursuant to the Memorandum of Sharing, without need of the presentation of proof of payment of the expanded 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 TCTs that a development project is being undertaken on the land 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 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 Memorandum of Sharing. 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-373-2008 dated June 19, 2008) ISDCaT 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service