An Ordinance Amending Article VII, Section 317 (A) and (C) of Ordinance No. 51, Series of 2017 Entitled "An Ordinance Enacting the Revised Revenue Code Providing Penalties for Violation Thereof"

January 26, 2010 BIR RULING [DA-(JV-006) 014-10] Section 22 (B); DA-450-2004 Pulcena Realty Development Corporation Barangay Pinagtipunan, General Trias Cavite Attention: Mr. Virgilio C. Patam President Gentlemen : This refers to your letter dated February 15, 2009 requesting a confirmatory ruling to the effect that the Joint Venture Agreement (JVA) With Authority to Mortgage between Juliana G. Cabingan and Leonida Garcia Vergara, the landowners and Pulcena Realty Development Corporation, will have the following tax consequences: 1. The JVA will not create a separate taxable joint-venture within the meaning of Section 22 (B), in relation to Section 27 (A) of the Tax Code of 1997, as amended; and 2. Since the JVA will not create a separate taxable joint-venture, the subsequent division and allocation of ownership of the developed property between the parties will not be subject to income tax. It is represented that Juliana G. Cabingan and Leonida Garcia Vergara are the owners of parcels of land located at Brgy. Paradahan, Cavite, with a total area of 7,727 square meters and more particularly described under TCT Nos. T-114344 and T-114343 issued by the Registry of Deeds for the Province of Cavite; that the Landowners desire to put the subject parcels of land into beneficial use and to develop into subdivision complete with facilities; that Pulcena Realty Development Corporation having the facilities and technical know-how for the development work of the property has agreed to undertake the construction and development of the same; and that the salient feature of the JVA is: ECSaAc "ARTICLE III SHARING AGREEMENT For the consideration of the developer's obligation and other undertaking it assumes herein, the Developer's share in this business ventures shall constitute in a fifty-fifty sharing, (50%) share to the OWNER and fifty percent (50%) share to the DEVELOPER." In reply, please be informed as follows: 1. Pursuant to Section 22 (B) of the NIRC, as amended, 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 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 no be considered an additional income tax lien. Considering the clear provision of Section 22 (B) which clearly 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 Juliana G. Cabingan, Leonida Garcia Vergara and Pulcena Realty Development Corporation is not a corporation subject to corporate income tax. However, for VAT purpose, the joint venture (or consortium) is by itself a taxable entity. Moreover, the contribution of each of the parties to the joint venture is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax since the parties did not convey or transfer any ownership or interest when they contributed to the joint venture but merely pooled their resources to a common fund. The said contributions constitute their capital contribution to the joint venture project. The transfer are also not subject to value-added tax (VAT), since the transfers are not in the course of business but capital contributions. 2. The allocation of saleable lots of the Project between the landowners and Pulcena Realty Development Corporation in consideration of their respective contributions 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 party has contributed. EISCaD The Subdivision Contract whereby the landowners and Pulcena Realty Development Corporation will allocate unto each other their share in the saleable area in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 of the NIRC, 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 contributed. However, the acknowledgment to said Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the NIRC, as amended. However, upon the 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 regular income tax rate under Section 24 (A) and 27 (A) of the NIRC, as amended and to the creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR 6-2001. Moreover, said sale shall be subject to the documentary stamp tax imposed under Section 196 of the NIRC, as amended based on the gross selling price or fair market value of the properties whichever is higher. Likewise, the said sale shall 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 creditable withholding tax, value-added tax and the corresponding documentary stamp tax. Provided, that the parties to the joint venture shall cause the Register of Deeds to annotate on the Transfer Certificate/s of Title 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 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 developed/saleable lots/units in accordance with the allocation ration in the Joint Venture Agreement. For this purpose, a compliance report of the project indicating the number of lots/units developed/built, respective TCTs/CCTs and the party in whose name the corresponding title was issued. DTSaHI 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, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner