Filinvest Land, Inc.

December 24, 2008 BIR RULING [DA-(JV-058) 575-08] Sec. 22; DA-620-07 Filinvest Land, Inc. 173 P. Gomez Street San Juan, Metro Manila Attention: Atty. Adrian V. Bancoro Tax & Corporate Counsel Gentlemen : This refers to your letter dated September 29, 2008 requesting confirmation of the various tax consequences arising from a Joint Venture Agreement for construction purposes, between Filinvest Land, Inc. and Ms. Graciela B. Eleazar. HIAEcT The facts as represented are as follows: Filinvest Land, Inc. ("FLI", for brevity), a corporation duly organized and existing under the laws of the Republic of the Philippines, is engaged in the business of acquiring, developing and selling real estate, including commercial buildings, residential subdivisions and condominium units. Ms. Graciela B. Eleazar ("GBE", for brevity), on the other hand, is the legal, absolute and registered owner of four (4) parcels of land and jointly holds (with FLI) an exclusive right of way and right of perpetual use over a portion of another parcel of land all located at Anonas St., Sta. Mesa, Manila presently covered by Transfer Certificate of Title Nos. 281080, 281081, 281082, 281083 and 272539, all of the Registry of Deeds of Manila, with an aggregate area of thirty thousand six hundred fifty-one and 4/100 square meters (30,651.04 sq. m.), more or less (hereinafter referred to as "Properties"). On February 8, 2008, FLI, as the developer, entered into a Development Agreement with GBE for the development of the abovementioned Properties. The salient portions of the Development Agreement are as follows: 1. FLI shall undertake the development of the Properties into a mixed-use commercial and residential complex consisting of condominium and medium rise buildings (MRB) in accordance with a Master Development Plan to be prepared in accordance with the Condominium Act; 2. FLI will shoulder all the equipment, engineering, materials, supplies and labor expenses incurred relative to the construction, completion and development of the Properties; 3. For and in consideration of their respective obligations and other undertakings which they assumed pursuant to their Agreement, FLI will receive ninety-two percent (92%) of the saleable condominium and MRB units resulting from said development while the remaining eight percent (8%) shall be for GBE; and 4. Upon approval of the development plan by the proper government agencies, FLI upon consultation with GBE shall allocate the saleable condominium and MRB units in accordance with their aforesaid sharing in the most equitable and practical way possible with due consideration and regard to the location and projected values of such units. Based on the foregoing facts, you are requesting confirmation that: 1. The Development Agreement between FLI and GBE for the development of the Properties at Anonas St., Sta. Mesa, Manila into a commercial and residential complex will not give rise to a taxable joint venture as provided under Section 22 (B), in relation to Section 27 (A), both of the National Internal Revenue Code, as amended ("NIRC", hereafter); 2. The transfer of the Properties and the allocation of saleable units, in accordance with the agreement between the parties (92% for FLI and 8% for GBE) , in consideration of their respective contributions is not a taxable event and is not subject to income tax, and, consequently, withholding tax, and value-added tax (VAT), since said transfer/allocation is in fact a mere return of capital that each has contributed to the joint venture; and 3. The Development Agreement and the Partition Agreement whereby FLI and GBE shall allocate unto each other their share in the saleable units in consideration of their respective contributions, are not subject to the Documentary Stamp Tax (DST) imposed under Section 196 of the NIRC, as amended, nor to any income tax and, consequently, withholding tax, since the transfer of the Properties and the allocation are made without monetary consideration and the same are not in connection with any sale. Rather, the transfer/partition is made merely to account for the respective shares of the parties in the Properties and to segregate the saleable units between them, representing the return of capital which each contributed. However, it is understood that should FLI sell any of the saleable units allocated to it, to third parties, the gain that may be realized from said sale will be subject to regular corporate income tax at the rate of 35% (reduced to 30% effective January 1, 2009) in accordance with Section 27 (A) of the NIRC, and consequently to withholding tax as implemented under Revenue Regulations No. 2-98, as amended ("RR No. 2-98"). If, on the other hand, GBE sells any of the saleable units allocated to her, the same would be subject to capital gains tax (CGT) at the rate of 6% in accordance with Section 24 (D) (1) of the NIRC. In reply thereto, please be informed as follows: Section 22 (B) of the NIRC, as amended, states thus: "Section 22. Definitions. When used in this Title: "xxx xxx xxx. "(B) The term 'corporation' shall include partnerships, 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. . . ." (underscoring supplied) The abovementioned exemption was initiated under Presidential Decree (P.D.) No. 929, dated May 4, 1976, which amended the definition of a "taxable" corporation in the NIRC, as amended, to specifically exclude joint ventures formed for the purpose of undertaking construction projects. Said P.D. instituted the amendment of the definition of the term "taxable" corporation in recognition of the following situations: (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 local contractors to enter into joint ventures to pool their limited resources in undertaking big construction projects. Hence, to assist the local contractors in achieving competitiveness with foreign contractors, the joint ventures formed by said local contractors were thus deemed as not falling under the definition of a "taxable" corporation, and thus not subject to income tax. This was, and still is, the intention of the legislature. ECDHIc Such being the case, the Development Agreement entered into by and between FLI and GBE is not subject to the income tax under Section 27 (A) of the Tax Code of 1997, as amended. (BIR Ruling No. DA-694-07 dated December 28, 2007; BIR Ruling No. 693-07 dated December 28, 2007) Moreover, the allocation of the saleable units between FLI and GBE, which is done effectively in consideration of the parties' respective contributions, does not constitute a taxable event, as no income is actually realized by either FLI or GBE. The Partition Agreement will be executed without consideration and it is not in connection with any sale between the said parties. As has been ruled by the Bureau of Internal Revenue (BIR) on numerous occasions, income, in a broad sense, means all wealth which flows into the taxpayer other than as a mere return of capital (Section 36, Revenue Regulations No. 2) . FLI and GBE, both having contributed to the development of the Properties, will not realize any income upon the transfer of the Properties and allocation of the saleable units. Hence, there is no income tax and, consequently, withholding tax due on said transfer/allocation. The said transfer/allocation, likewise, is not subject to VAT. Under Section 105 of the Tax Code of 1997, as amended, any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services and any person who imports goods shall be subject to VAT. However, by transferring the Properties and allocating the saleable condominium and MRB units, neither FLI nor GBE sells, barters, exchanges goods or property, or renders services to be subject to VAT. (BIR Ruling Nos. DA-655-07 dated December 17, 2007; 240-01 dated November 16, 2001; BIR Ruling No. DA-115-01 dated September 5, 2001) Further, the Partition Agreement whereby FLI and GBE will allocate unto each other their share in the saleable lots in consideration of their respective contributions, shall not be subject to the DST imposed under Section 196 of the Tax Code of 1997, as amended, considering that, as stated earlier, the transfer/allocation is made without monetary consideration and is not in connection with a sale. In this regard, Section 185 of the Revised Documentary Stamp Tax Regulations (Regulations No. 26) provides that "conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable". Accordingly, since the transfer of the Properties and the allocation of the saleable units shall be made without consideration and they will not be in connection with any sale between FLI and GBE, no DST is due and collectible on the Development Agreement and the planned Partition Agreement. However, the notarial acknowledgments to said Development Agreement and Partition Agreement shall be subject to the DST pursuant to Section 188 of the Tax Code of 1997, as amended, in the amount of Fifteen Pesos (P15.00). FLI and/or GBE will only realize income upon their respective sales, to third parties, of the saleable units allocated to each of them. In this regard, said sales, on the part of FLI, would be subject to regular corporate income tax at 35% (reduced to 30% effective January 1, 2009) in accordance with Section 27 (A) of the Tax Code of 1997, as amended, and consequently to withholding tax as implemented under RR No. 2-98, as amended. Said sales by FLI to third parties would also be subject to VAT at the rate of 12%, in accordance with Sections 106 of the Tax Code of 1997, as amended. However, the sale of said saleable units may be exempted from VAT in accordance with Section 109 (P) of the same Tax Code. Further, said sales would be subject to the DST at the rate of fifteen pesos (P15.00) for each one thousand pesos (P1,000.00) of the consideration or value of the unit/s sold, in accordance with Section 196 of the same Code. On the other hand, said sales to third parties, if ever undertaken by GBE, would be subject to CGT at the rate of 6% in accordance with Section 24 (D) (1) of the Tax Code and the DST in accordance with Section 196 of the same at the rate mentioned above. (BIR Ruling Nos. 660-2007 dated December 18, 2007; 621-07 dated December 7, 2007; and 620-07 dated December 7, 2007) ITSCED Finally, this ruling authorizes the Revenue District Officer of the revenue district where the property is located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the transfer of the titles to the lots to be received by FLI and GBE 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. Provided, however, that the parties to the joint venture shall cause the Register of Deeds to annotate on the TCTs involved 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 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 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 (JV-055) 557-2008 dated December 19, 2008) 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. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service