BIR Ruling No. 108-10

October 19, 2010 BIR RULING NO. 108-10 Sec. 22 (B); DA(JV-020)537-2009 dtd. 9/14/09 Avida Land Corp. 8/F Mondragon Building 324 Sen. Gil Puyat Avenue Makati City Attention: Atty. Arlene Montero Legal Counsel Gentlemen : This refers to your letter dated July 01, 2010, requesting confirmation on the tax implications of the joint venture for construction purposes between Aurora Properties, Inc. ("Aurora") and Avida Land Corp. ("Avida") for the joint development of a parcel of land located in Barangay Canlubang, Calamba City, Laguna, into a residential subdivision. Background Aurora is a corporation duly organized and existing under Philippine laws with principal place of business at the 31/F Tower One Exchange Plaza, Ayala Triangle, Ayala Avenue, Makati City, and duly authorized to engage in real estate business as provided in the Primary Purpose of its Amended Articles of Incorporation, as follows: "PRIMARY PURPOSE To acquire, hold and dispose of by purchase, lease, exchange, mortgage, donation or in any other manner, conditionally and absolutely, and to use, improve, develop, sub-divide, manage and hold for investment or otherwise, real estate or any interest therein of any kind, whether improved or unimproved, and to erect or cause to be erected on any real estate buildings or other similar structures, together with their appurtenances." On the other hand, Avida is also a corporation duly organized and existing under Philippine laws with principal place of office at the 8/F Mondragon Building, 324 Sen. Gil Puyat Avenue, Makati City. The primary purpose of Avida as duly authorized in its amended Articles of Incorporation is as follows: SCETHa "PRIMARY PURPOSE To acquire by purchase, lease, donation or otherwise, and to own, use, improve, develop, subdivide, sell, mortgage, exchange, lease, develop and hold for investment or otherwise, real estate buildings, houses, apartments, and other structures of whatever kind, together with their appurtenances; to carry on and conduct a general contracting business with any party, including the constructing, repairing, remodeling, operation, maintenance, financing of, or otherwise to engage in, any work upon any and every kind and description of public works, buildings, structures, earth construction and installations; to enter into and execute contracts or to make or receive assignments of contracts therefore or relating thereto; and to manufacture and/or furnish construction and building materials, equipment and supplied connected therewith." Aurora is the registered owner of a parcel of land (the "Property") with an area of approximately Two Hundred Fifty-Nine Thousand One Hundred Fifty-Eight (259,158) square meters located in Barangay Canlubang, Calamba City (the "Property") more or particularly described in and covered by Transfer Certificate of Title No. T-681854 of the Registry of Deeds for Calamba City. On January 13, 2010, Aurora and Avida entered into a Joint Development Agreement (the "JDA") for the formation of a joint venture for construction purposes whereby Aurora, as registered owner of the Property, shall contribute the Property to the joint venture, and Avida, shall contribute project development services to construct and develop the Property into a residential subdivision (the "Project") with shared amenities, utilities and facilities to be developed on the Property. In return for their respective contribution each party shall receive their respective allocation of Saleable House and Lot Units/Saleable Lot Units from the Project. Aurora shall receive an allocation of eleven percent (11%) of the saleable House and Lot Units and twenty-five percent (25%) of the Saleable Lots of the Project. Avida shall receive an allocation of eighty-nine percent (89%) of the Saleable House and Lot Units and seventy-five percent (75%) of the Saleable Lots of the Project. In reply, please be informed as follows: Section 22 (B) of the Tax Code of 1997, as amended, states as follows: "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. 'General professional partnerships' are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business." (Emphasis supplied) TCacIA The abovementioned exemption was initiated under Presidential Decree (PD) No. 929, dated May 4, 1976, which amended the definition of a "taxable" corporation in the Tax Code, as amended, to specifically exclude joint ventures formed for the purpose of undertaking construction projects. Said PD 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. Such being the case, the Development Agreement entered into by and between Aurora and Avida is not subject to the income tax under Section 27 (A) of the Tax Code of 1997, as amended. Moreover, the allocation of the saleable units between Aurora and Avida, which is done effectively in consideration of their respective contributions, does not constitute a taxable event, as no income is actually realized by either Aurora and/or Avida. The Partition Agreement or Deed of Allocation will be executed without consideration, and will not be in connection with any sale between the said parties. As has been ruled by the 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, RR No. 2) . Aurora and Avida, having contributed to the development of the aforementioned real properties, will not realize any income upon the allocation of the saleable units. Hence, the allocation of units arising from the Partition Agreement is not subject to income tax, and consequently, to withholding tax. The said allocation, likewise, is not subject to VAT. Under Section 105 of the 1997 Tax Code, 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 contributing the parcels of land, Aurora and Avida neither sells, barters, exchanges goods, property nor renders services to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001; BIR Ruling No. DA-115-2001 dated September 5, 2001). IHAcCS Aurora and/or Avida will only realize income upon their respective sales of the saleable units allocated to each of them. In this regard, said sales to third parties, if ever undertaken by Aurora and/or Avida, would be subject to regular (corporate) income tax at the rate of 30%, in accordance with Section 27 (A) of the 1997 Tax Code, as amended, and consequently to withholding tax as implemented under Revenue Regulations (RR) No. 2-98, as amended. The said sales by Aurora and/or Avida to third parties would likewise be subject to the VAT at the rate of 12%, in accordance with Sections 106 and 109 of the 1997 Tax Code, as amended, and to the Documentary Stamp Tax (DST) at the rate fifteen pesos (P15.00) for each one thousand pesos (P1,000.00), or fractional part thereof in excess of one thousand pesos (P1,000.00) of such consideration or value, in accordance with Section 196 of the 1997 Tax Code, as amended. Further, the Partition Agreement or Deed of Allocation whereby Aurora and Avida will allocate unto each other their share in the saleable units in consideration of their respective contributions, is not subject to the DST imposed under Section 196 of the 1997 Tax Code, as amended, considering that, as stated earlier, the 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 aforementioned Partition Agreement will be executed without consideration and not in connection with a sale between Aurora and/or Avida, no DST therefore is due and collectible on said Partition Agreement or Deed of Allocation. However, the notarial acknowledgment to said Partition Agreement or Deed of Allocation shall be subject to the DST pursuant to Section 188 of the 1997 Tax Code, as amended, in the amount of P15.00. On the other hand, since under the Joint Venture Agreement Avida undertakes to market the saleable lots allocated to Aurora, by virtue of an exclusive marketing agreement, the marketing fees derived by Avida thereof shall be subject to income tax imposed under Section 27 (A) of the Tax Code of 1997, as amended, and consequently, to the withholding tax imposed under Revenue Regulations No. 2-98, as amended, and to the VAT imposed under Section 108 of the same Tax Code. The sale by Avida of the lots allocated to Aurora to third parties by virtue of the Marketing Agreement, shall be subject to income tax and consequently, to the creditable withholding tax (CWT) and to VAT. The CWT attributable thereto shall be credited against the income tax liability of Aurora. Moreover, said sale is subject to the DST imposed under Section 196 of the same Tax Code at the rate above-mentioned. (BIR Ruling Nos. 660-2007 dated December 18, 2007; 621-07 dated December 7, 2007; and 620-07 dated December 7, 2007) 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 based on their respective allocations pursuant to the Deed of Partition/Partition Agreement, without need of the presentation of proof of payment of the CWT, VAT and the corresponding DST. Provided, that the parties to the joint venture shall cause the Register of Deeds to annotate on the TCT that a development project is being undertaken on the land and is the object of the Joint Venture Agreement between the parties, and that the 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 full distribution of the finished/saleable units in accordance with the allocation ratio in the Joint Venture Agreement/Project Agreement. For this purpose, a compliance report of the project indicating the number of units developed/finished, respective CCTs and the party in whose name the corresponding title was issued. SEIcHa Finally, since under the Joint Venture Agreement/Project Agreement the developer undertakes to market the finished/saleable units allocated to the landowner by virtue of an exclusive marketing agreement, the marketing fees derived by the developer thereof shall be subject to income tax imposed under Section 27 (A) of the Tax Code of 1997, as amended, and consequently, to the withholding tax imposed under Revenue Regulations No. 2-98, as amended, and to the VAT imposed under Section 108 of the same Tax Code. (BIR Ruling DA(JV-020)537-2009 dated September 14, 2009) 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue