Francisco G. Tagao Law Office

December 3, 2008 BIR RULING [DA-(JV-046) 484-08] 22 (B); DA-373-2008 Francisco G. Tagao Law Office Lot 23 Block 56, Francisco Reyes St. GAHA, BF Homes Paraaque Subdivision Paraaque City Attention: Atty. Francisco G. Tagao Gentlemen : This refers to your letter dated November 25, 2008, requesting on behalf of your clients, Ayala Land, Inc. (ALI) and Manila Jockey Club, Inc. (MJCI), for confirmation of opinion on the tax consequences of the Joint Development Agreement (JDA) executed by them for the construction and development of a building complex on several parcels of land located in Sta. Cruz, Manila. It is represented that on July 18, 2007, ALI and MJCI entered into a JDA which was subsequently amended on November 9, 2007 and supplemented in October 2008 by a Supplement Agreement executed by the parties (hereinafter referred to as the Amended JDA) for the construction and development of a Building Complex on a Project Site provided by MJCI; that Section 2.2 of the said Amended JDA defines the term "Building Complex" as consisting of the Office Buildings and Retail Development on the Project Site, all of which are intended to be constructed as a single integrated development; that the Building Complex will have a Gross Floor Area of about 53,214 sq.m. and a Gross Leasable Area of approximately 42,752 sq.m.; that Section 1.1 of the Amended JDA defines the term "Retail Development" as the single-level retail development in the Building Complex allocable for retail use which has a Gross Leasable Area of about 2,239 sq.m.; that the same Section 1.1 of the Amended JDA defines the term "Office Buildings" as the two office buildings to be constructed as part of the Building Complex allocated for Office Use which shall have a Gross Leasable Area of approximately 40,513 sq.m.; that the term "Office Use" is further defined as the use of the unit or a given space in the Building Complex for conducting the affairs of a business, profession or service, other than Retail Use; and that the term "Retail Use" is also defined as the use of a unit or a given space in the Building Complex for the sale or provision of merchandise, goods, commodities or services for their end-use or consumption. It is further represented that the Building Complex to be constructed is intended to cater primarily to the office requirements of business processing outsourcing companies, such as call center operation and outsourcing for information technology and other back office operations. Pursuant to their agreement MJCI will provide the Project Site on which the Building Complex will be constructed and developed and that the Amended JDA defines the term "Project Site" as follows: "'Project Site' shall collectively refer to the following parcels of land: (i) a parcel of land with an aggregate area of 10,849 sq. m. located at Sta. Cruz, Manila, covered by Transfer Certificate of Title No. 270084 of the Registry of Deeds of Manila attached hereto as Annex B, and (ii) a parcel of land with an area of 762.30 sq. m. located at Sta. Cruz, Manila, covered by Transfer Certificate of Title No. 511126 of the Registry of Deeds of Manila attached hereto as Annex B-1, which are both delineated in the location map attached hereto as Annex A." The parties clarified in the Amended JDA that the correct title number of the Transfer Certificate of Title (TCT) covering the additional land for the Project Site with an area of 762.30 sq.m. is TCT No. 51126 of the Registry of Deeds for the City of Manila and not TCT No. 511126. MJCI will contribute fully for the construction and improvement of the Retail Development and its appurtenant parking slots and shall allocate the use of the Project Site exclusively for purposes of commencing and implementing the Project; that title over the parcels of land which is defined as Project Site remains with MJCI; that ALI and MJCI shall contribute for the construction and development of the Office Buildings, including the appurtenant parking slots in accordance with the following ratio: ALL-70% and MJCI-30%; that in return for MJCI's full construction and improvement of the Retail Development, it shall receive as part of its allocation, all Developed Units in the Retail Development; that in return for MJCI and ALI's respective contributions for the construction and development of the Office Buildings, they shall receive as their respective allocations, Developed Office Units with an aggregate Gross Leasable Area to be computed in accordance with the formula stated in the Amended JDA and that the parties shall execute a Deed of Partition for the purpose of effecting the distribution of their respective Developed Units, Developed Office Units and Developed Floor for the Project. Upon completion of the construction and development of the Building Complex, the parties will subsequently enter into a separate Joint Venture Agreement (JVA) to pool the units allocated to them from the Project and share proportionately in the revenues from such units in accordance with the terms of such JVA; and that ALI will lease from MJCI the Project Site and the air space of the Project to the extent of the areas occupied by the Developed Units of ALI from the Project. On the bases of the above, you would now like to request for a confirmation of the following: 1. The joint venture formed under the Amended JDA between ALI and MJCI whereby MJCI will provide the Project Site on which they will jointly undertake the construction and development of the Building Complex is not treated as a joint venture taxable as a corporation pursuant to Sec. 22 (B), in relation to Sec. 27 (A), both of the 1997 Tax Code. 2. The provision of the Project Site, with title remaining with MJCI under the Amended JDA for the purpose of undertaking jointly the construction and development of the Building Complex is not a taxable event that will give rise to income tax, capital gains tax/creditable withholding tax and value-added tax. 3. The allocation and distribution to ALI and MJCI of their respective shares in the developed units in accordance with the Amended JDA is not a taxable event, and as such is not subject to income tax, capital gains tax/creditable withholding tax and value-added tax because the allocation is a mere return of capital that each of the parties has contributed to the Project. Accordingly, the Deed of Partition that they will execute after the completion of the Project and other documents such as the JDA, its amendment and the Supplement Agreement and their annotation in the TCT of MJCI to evidence such allocation and distribution is not subject to value-added tax, income tax, withholding tax and documentary stamp tax under Sec. 196 of the Tax Code of 1997, as amended, except the notarial acknowledgment to the deed and such other documents which is subject to documentary stamp tax of P15.00 under Sec. 188 of the same Tax Code. 4. The rental income from the lease of the Project Site by MJCI to ALI and the air space of the Project Site to the extent of the areas occupied by the Developed Units allocated to ALI shall be subject to documentary stamp tax under Sec. 194 of the 1997 Tax Code, 12% value-added tax, 5% creditable withholding tax and the normal corporate income tax. In reply, please be informed that we confirm as follows: 1. 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 of ALI and MJCI 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) TCHEDA 2. The provision of the Project Site, with title remaining with MJCI under the Amended JDA for the purpose of undertaking jointly the construction and development of the Building Complex is not a taxable event that will give rise to the payment of income tax, capital gains tax/creditable withholding tax and value-added tax. 3. The allocation and distribution to ALI and MJCI of their respective shares in the developed units in accordance with the Amended JDA is not a taxable event, and as such, is not subject to income tax, capital gains tax/creditable withholding tax and value-added tax because the allocation is a mere return of capital that each of the parties has contributed to the Project. Moreover, the Deed of Partition that they will execute after the completion of the Project and other documents such as the JDA, its amendment and the Supplement Agreement and their annotation in the TCT of MJCI to evidence such allocation and distribution is not subject to value-added tax, income tax, withholding tax and documentary stamp tax under Sec. 196 of the Tax Code of 1997, as amended, except the notarial acknowledgment to the deed and such other documents which is subject to documentary stamp tax of P15.00 under Sec. 188 of the same Tax Code. The transfer is also not subject to VAT since under Section 105 of the 1997 Tax Code, 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 parcels of land, MJCI neither sells, barters, exchanges goods, property nor renders service to be subject to VAT. 4. The rental income from the lease of the Project Site by MJCI to ALI as well as the air space of the Project Site to the extent of the areas occupied by the Developed Units allocated to ALI shall be subject to documentary stamp tax under Sec. 194 of the Tax Code of 1997, 12% VAT, 5% creditable withholding tax and the normal corporate income tax. 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 documentary stamp tax imposed under Sec. 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 value-added tax. This ruling will be a sufficient basis for the annotation of the respective ownership, title to, rights and interests of the parties in TCT Nos. 270084 and 51126 issued in the name of MJCI and/or other documents and instruments to evidence their respective ownership, title to, rights and interests such as the Deed of Partition, the JDA, the amendment to the JDA and the Supplement Agreement. This 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service