Santiago, Arevalo, Asuncion, Dela Cruz and Associates

December 19, 2008 BIR RULING [DA-(JV-055) 557-08] 22 (B); DA-373-2008 Santiago, Arevalo, Asuncion, Dela Cruz and Associates 5th Floor, Dominga Bldg. III 2113 Chino Roces Ave. cor. Dela Rosa St. Makati City Attention: Atty. McNeil M. Rante Gentlemen : This refers to your undated letter on behalf of your client, Citystate Properties & Management Corp. (CPMC) a domestic corporation duly registered with the Securities and Exchange Commission (SEC) under Company Registration No. CS200704407. On July 4, 2007, CPMC as the "Developer" had entered into a Joint Venture Agreement (JVA) with Batulao Bio Loop Farms, Inc. (BBLFI) and Group Developers, Inc. (GDI) as the "Landowners" for the development of the latter's ten (10) parcels of land located at Brgy. Kaylaway, Nasugbu, Batangas into a mix-use type of development (residential/commercial/farm lots or the Project) and to be called the Batulao Monte Grande. The aforestated properties are covered by Transfer Certificates of Title (TCT) Nos. T-44649, T-41390, T-44949, T-44950, T-44951, T-44952, T-44953, T-44954, T-44955 and T-44956 with an aggregate area of 1,862,616 sq.m. You now request for a confirmation of opinion that: 1. The JVA executed by and among BBLFI, GDI with CPMC for the development of the subject properties into a mix-use type of development will not give rise to a taxable joint venture as provided under Section 22(B), in relation to Section 27(A) both of the 1997 Tax Code, as amended; 2. The allocation of the saleable and disposable subdivided lots per lot type (residential/commercial/farm lots) between the Landowners and the Developer in consideration of their respective contributions, as stipulated in the JVA is not a taxable event and is not subject to income tax, and subsequently to withholding tax and Value-Added Tax (VAT), since the allocation of saleable and disposable subdivided lots is in fact a mere return of capital that each parties has contributed; 3. That the Deed of Partition to be executed by the Landowners and Developer allocating unto each other their shares in the saleable and disposable subdivided lots in consideration of their respective contributions is not subject to the documentary stamp tax (DST) imposable under Sec. 196 of the Tax Code of 1997, as amended, nor to any income tax, and consequently to withholding tax, since the allocation is made without monetary consideration and is not in connection with a sale but merely to define and segregate the saleable lots between the parties, as the return of capital which each has contributed. In reply, please be informed as follows: 1. Pursuant to Sec. 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. SHCaDA 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 BBLFI, GDI and CPMC 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) 2. The allocation of the saleable and disposable subdivided lots in the Project whereby BBLFI and GDI shall be entitled to 35% thereof and CPMC to 65%, 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. (BIR Ruling No. DA-192-2001 dated October 17, 2001) The transfer is also not subject to VAT since under Sec. 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, BBLFI and GDI, neither sell, barter, exchange goods, property nor render service to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001) 3. The Deed of Partition whereby BBLFI, GDI and CPMC will allocate unto each other their shares in consideration of their respective contributions is not subject to the DST imposed under Sec. 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 saleable area between the parties, as the return of the capital which each has contributed. However, the acknowledgment to said Deed of Partition is subject to the DST pursuant to Section 188 of the Tax Code of 1997, as amended. 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 expanded withholding tax under RR No. 2-98, as amended by RR No. 6-2001 or capital gains tax under Sec. 27 (D) (5), as the case may be. Moreover, such sale shall be subject to the DST 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 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 expanded withholding tax, VAT and the corresponding DST. 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 lands 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 Deed of Partition. 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) 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. aEDCAH Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service