Landco Pacific Corporation

December 17, 2008 BIR RULING [DA-(JV-054) 546-08] Sec. 22; Joint Venture Landco Pacific Corporation 3/F, Centermall Building No. 51 Presidents Ave., BF Homes Paraaque City Attention: Mr. Bingle Talatala Gentlemen : This refers to your letter dated November 13, 2008 requesting for confirmation of your opinion on the following issues, viz.: 1. The joint venture by and between Landco Pacific Corporation, as the Developer, and Aplaya Laiya Corporation, as Landowner, is not subject to income tax under Section 27 of the Tax Code of 1997, as amended, as a separate taxable entity; 2. The assignment of the resultant saleable lots, road lots, parks, easements, open spaces and other common areas by the Landowner to the Developer as the latter's share in the project is not a taxable withholding tax, because the aforestated assignment is a mere return of capital contribution, and therefore is not a taxable event; 3. The assignment of the resultant saleable lots, roads, parks, easements, open spaces and other common areas by the Landowner to the Developer as the latter's share in the project is not subject to VAT since under Section 105 of the Tax Code of 1997, as amended, any person who, in the course of trade and business, sells, barters, exchanges, leases goods or properties, renders services and any person who imports good shall be subject to VAT imposed in Section 106 to 108 of the same Tax Code. Hence, by contributing the parcels of land, the Landowner, neither sells, barters, exchanges goods, properties nor renders service to subject to VAT; 4. Conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable (Section 185, Regulations No. 26). The Deed of Partition is not in connection with a sale made to the joint venture partners. In fact, the purpose of the conveyance to the joint venture partners is the mere return of capital that each has contributed. Accordingly, the Deed of Partition to be executed by the Parties whereby they will allocate and distribute among themselves their respective shares in the Project (saleable lots, road lots, parks, easements, open spaces and other common areas) in exchange for their respective contributions, being without monetary consideration is not subject to donor's tax imposed under Section 98 of the Tax Code of 1997. 5. The Agreement under which the Developer and the Landowner will allocate to themselves their respective shares in the saleable lots, road lots, parks, easements, open spaces and other common areas in the 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, because the allocation is made without monetary consideration and is not in connection with a sale. The allocation is made merely to segregate the saleable area, road lots, parks, easements, open spaces and other common areas between the parties, as the return of the capital which each has contributed; ICTDEa 6. The transfer without monetary compensation by the joint venture partners of road lots, parks, easements, and open spaces situated in the project subject of the joint venture to the village association is exempt from the capital gains tax and donor's tax; 7. The conveyance of the land and common areas of the Project in favor of the village association being without monetary consideration and not in connection with a sale made to the village association did not generate income and a fortiori, not subject to income tax and/or creditable withholding tax. Since the said conveyance is not a sale, it is likewise not subject to VAT imposed under Section 106 of the Tax Code of 1997, as amended, neither will it be subject to the documentary stamp tax on sales or conveyance of real property imposed under Section 196 of the same Code. However, the notarial acknowledgement to said Deed of Conveyance is subject to documentary stamp tax of fifteen pesos (php15.00) pursuant to Section 188 of the Tax Code of 1997. The facts as represented are as follows: The Landowner is the registered owner of certain parcels of land situated in Laiya, San Juan, Batangas containing a total area of 1,441,623 square meters covered by the following Original and/or Transfer Certificates of Title (TCTs/OCT's) issued by the Registry of Deeds of the Province of Batangas: TCT/OCT No. Lot No. Area (sq.m) OCT-04510 68 58,801 TCT-97555 69 143,641 TCT-95914 84 91,936 TCT-96644 115-A 141,845 TCT-98886 124 60,293 TCT-96334 125 244,369 OCT-04472 126 151,420 OCT-04507 127 15,215 TCT-103791 128 171,427 TCT-95979 129-A 32,726 TCT-95980 129-B 40,039 TCT-95978 129-C 40,039 TCT-95805 129-D 40,038 TCT-73561 141 14,074 TCT-73562 142 1,935 OCT-04484 144 108,800 OCT-04469 145 15,305 OCT-04470 143 15,264 OCT-04471 146 5,870 TCT-93333 147 48,586 Total Area 1,441,623 ======== The above described parcels of land which have been converted and identified as Tourism Development Area are located in Barangay Laiya Aplaya, San Juan, Batangas. The Developer is a corporation organized and existing under the laws of the Philippines. It has the managerial expertise, experience, organization and financial resources to develop the above-described parcel of land to their highest and best use, yielding optimal profits and ensuring value appreciation over time. On June 18, 2007, a Joint Venture Agreement (JVA) was entered into by the Developer and the Landowner, whereby the Landowner shall contribute its above-mentioned properties for the land development project. The Developer, on the other hand, shall be responsible in the implementation of the development project. The development project shall be undertaken by the Landowner and the Developer under an unincorporated joint venture structure whereby sharing shall be on the basis of distribution of saleable or leasable lots to each of the parties in exchange for their respective contributions to the project. The distribution and allocation of individual lots shall be in accordance with the provisions of Section 16.1 and 16.2 of the JVA and on the basis of the agreed sharing scheme as provided in Section 4.1 thereof. Pertinent portions of Sections 16.1, 16.2 and 4.1 of the JVA state as follows: "16.1 Upon approval of the DEVELOPER's application of the Project by the House and Land Use Regulatory Board, the LANDOWNER and DEVELOPER shall apply to the Register of Deeds for the subdivision of the Property into saleable lots in the name of the LANDOWNER. The parties shall agree on the distribution/allocation of the Individual Lots between them based on the sharing scheme in Section 4.1 . . . ." "16.2 The DEVELOPER shall, at its own cost, cause the transfer of the certificates of title to Individual Lots allocated to it from the LANDOWNER's name to its own. Thereafter, the parties shall cause the annotation of the Joint Venture Agreement on each of the certificates of title to all the Individual Lots comprising the Property. . . . ." "4.1 The Net Proceeds shall be distributed between the LANDOWNER and the DEVELOPER as follows: cCTAIE For land sales: Selling Price per square meter LANDOWNER's DEVELOPER's (net of discounts but inclusive Share Share of VAT) of residential, commercial or special lots P5,000 to P8,250 40% 60% P8,250 or more 45% 55% The Landowner agreed that the Developer (or such affiliate of the Developer) shall act as the marketing and sales organization/selling agent for the sale to third party of the individual lots distributed/allocated in its favor (Sec. 6.1 of the JVA). All common areas like roads, playgrounds, parks, water supply, streets, etc. shall be turned over to the Village Association upon completion of such common areas (Sec. 5.2 (e) of the JVA). In reply, please be informed that this Office hereby confirms your opinion as follows: 1. Section 22 (B) of the Tax Code of 1997 provides that 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. It is to be emphasized, however, that P.D. 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 that it is the intention of the legislature to exclude joint venture or consortium formed for the purpose of undertaking construction projects from the definition of taxable corporation, the JVA entered into by and between the Landowner and the Developer is not subject to the corporate income tax under Section 27 (A) of the Tax Code of 1997 and is not required to file quarterly and final or adjustment/income tax returns. However, the co-venturers are separately subject to the regular income/corporate income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. (BIR Ruling No. DA-194-06 dated March 28, 2006) 2. The allocation and distribution of their respective shares in the Project (saleable lots, road lots, parks, easements, open spaces and other common areas) in consideration for their respective contributions to the said JVA is not a taxable event and is not subject to income tax, withholding tax, value-added tax and documentary stamp tax because the allocation is a mere return of capital that each has contributed. Moreover, in the event that any party defers its right to receive a specific allocation to a later phase of the project for as long as such allocation constitutes part of the total return of its capital, such deferment is still not subject to the aforementioned taxes. aSEHDA However, upon the subsequent disposition by the co-venturers of the said saleable lots allocated to them, the gain that may be realized by them from such sale will be subject to income tax and consequently, the creditable withholding tax under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001. In addition thereto, 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. (BIR Ruling No. DA-013-05 dated January 19, 2005) On the other hand, considering that the sale of the individual lots allocated to the Landowner is made through a marketing agent, the Developer or its affiliates, the commission income realized by said agent therefore shall be subject to the withholding tax as imposed under Revenue Regulations No. 2-98, as amended. 3. The Deed of Partition to be executed by the parties whereby they will allocate and distribute among themselves their respective shares in the Project (saleable lots, road lots, parks, easements, open spaces and other common areas) in exchange for their respective contributions, being without monetary consideration is not subject to income tax, withholding tax, value-added tax and documentary stamp tax. (BIR Ruling Nos. 207-92 dated July 16, 1992; 349-93 dated July 30, 1993; DA-025-95 dated January 11, 1995) 4. Conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable (Section 185, Regulations No. 26). The Deed of Partition is not in connection with a sale made to the joint venture partners. In fact, the purpose of the conveyance to the joint venture partners is the mere return of capital that each has contributed. Accordingly, the Deed of Partition to be executed by the parties whereby they will allocate and distribute among themselves their respective shares in the Project (saleable lots, road lots, parks, easements, open spaces and other common areas) in exchange for their respective contributions, being without monetary consideration is not subject to donor's tax imposed under Section 98 of the Tax Code of 1997, as amended. (BIR Ruling No. DA-219-06 dated April 7, 2006) 5. The transfer without monetary compensation by the joint venture partners of road lots, parks, easements, and open spaces situated in the project subject of the joint venture to the village association is exempt from the capital gains and donor's taxes. Since the above-mentioned transfer and conveyance of the subject real properties from the joint venture partners to the village association was made without any monetary consideration and is not in connection with a sale made to the village association, no income was generated by the joint venture partners and a fortiori, no creditable withholding tax is payable and collectible. Thus, the Deed of Conveyance is not subject to the creditable withholding tax prescribed by Revenue Regulations No. 2-98, as amended, implementing Section 57 (B) in relation to Section 27 (A) and (D) (5), all of the Tax Code of 1997, as amended. (BIR Ruling No. DA-219-06 dated April 7, 2006) Conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable. (Section 185, Regulations No. 26). The Deed of Conveyance is not in connection with a sale made to the village association. In fact, the purpose of the conveyance to the village association of the subject properties is for the common enjoyment and safety of the subdivision homeowners. Accordingly, the transfer of the saleable lots, road lots, parks, easements, open spaces and other common areas by the Landowner to the Developer as the latter's share in the project without monetary consideration is not subject to donor's tax imposed under Section 98 of the Tax Code of 1997, as amended. (BIR Ruling No. DA-219-06 dated April 7, 2006) The conveyance of the land and common areas of the Project in favor of the village association being without monetary consideration and is not in connection with a sale made to the village association, no income was generated and a fortiori, no income and/or creditable withholding tax is payable and collectible. Since the said conveyance is not a sale, it is likewise not subject to VAT imposed under Section 106 of the Tax Code of 1997, as amended, neither will it be subject to the documentary stamp tax on sales or conveyance of real property imposed under Section 196 of the same Code. However, the notarial acknowledgement to said Deed of Conveyance is subject to documentary stamp tax of fifteen (P15.00) pursuant to Section 188 of the Tax Code of 1997, as amended. (DA-040-2001 dated March 20, 2001, DA-194-06 dated March 28, 2006) 6. In connection with the above development project, the Joint Venture created and their respective 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 properties are located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the transfer of the titles to the lots to be received by the developer and the landowners 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. 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. AHaDSI Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service