February 22, 2010

BIR RULING [DA-(JV-011) 033-10]

019-96; 112-99; 019-05; UN170-95;

DA-002-08; DA411-07

Greenfield Development Corporation

Greenfield Corporate Center
88 United Street
Mandaluyong City

Attention: Duane A.X. Santos

Executive Vice President
and
Garney M. Candelaria
Head-Legal Division

Gentlemen :

This refers to your letter dated November 12, 2009 Greenfield Development
Corporation (Greenfield) is a corporation organized and existing under the laws of the
Philippine; that it is primarily engaged in the real estate business; that the Second
Article of the Articles of Incorporation of Greenfield provides for its primary purpose,
as follows:

"To purchase or otherwise acquire and own, use, hold, sell, convey,
exchange, lease, mortgage, take options to, and otherwise deal in urban and
rural real properties, whether improved or unimproved, and any interest or
right therein; to manage, administer and improve real properties owned or
controlled by the corporation; to erect, construct, enlarge, alter or improve
buildings or other structures on lands held or owned by the corporation; and to
promote, finance and manage building operations, subdivisions, real
developments or any other transactions involving real estate or any interest
therein."

that on the other hand, Bank of the Philippine Islands (BPI) is a corporation organized

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 and existing under the laws of the Philippines with principal office address at the BPI
Head Office Building, Ayala corner Paseo de Roxas Avenue, Makati City; that the
Second Article of the Articles of Incorporation of BPI provides for its primary
purpose, as follows: ETDSAc

"That the purposes for which said corporation is formed are to operate
under an expanded commercial banking authority, as well as to engage in and
carry on the business of a trust company and to conduct such other business as
is now or may hereafter be allowed by law; and by virtue thereof, to possess
and exercise the powers, rights, privileges and attributes of a commercial bank
with expanded commercial banking authority and a trust company, as
provided by law."

that BPI is the absolute and registered owner of a parcel of land identified as Lot
2056-E located in Barangay Don Jose, Sta. Rosa, Laguna, with a land area of One
Hundred Seventy Two Thousand One Hundred Fifteen (172,115) square meters, more
or less, and covered by TCT No. T-103710 of the Registry of Deeds of Calamba (the
BPI Property); that Greenfield and BPI agreed to establish an unincorporated joint
venture to pool their resources to develop the BPI Property into a first class residential
subdivision; that for this purpose, on June 26, 2009, Greenfield and BPI entered into a
Joint Venture Agreement (JVA) with a sharing of 60%-40% in favour of Greenfield
on the net proceeds of the sale of lots; that pursuant to Bangko Sentral ng Pilipinas
(BSP) Circular No. 518 series of 2006 dated March 9, 2006, the Monetary Board
approved the JVA on August 27, 2009; and that the basic terms and features of the
JVA are as follows:

a. The BPI Property shall be contributed by BPI to the joint venture and
shall be merged with another adjacent parcel or other surrounding
parcels of land owned by Greenfield (the aggregate of the BPI Property
and those of Greenfield is referred to in the JVA as the "Combined
Property") for development of the consolidated parcels of land into a
first class residential subdivision.

b. In addition to its own parcels of land, Greenfield shall contribute to the

joint venture its services to develop, market and sell the Combined
Property.

c. The parties shall share on a 60%-40% basis, in favour of Greenfield, on

the net proceeds of the saleable lots of the first 172,115 square meters of
the Combined Property that shall be developed, marketed and sold (the
Subject Property).
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 i. To facilitate the documentation of sales to third parties, 60% of
the subdivided saleable titles of the Subject Property shall be
registered in the name of Greenfield, while the 40% of the
subdivided titles of the Subject Property shall be registered in the
name of BPI. This arrangement notwithstanding, the parties
agree to share in the net proceeds of the sales of the subdivided
saleable titles of the Subject Property on a 60%-40% basis, in
favour of Greenfield. EacHSA

Based on the foregoing representations, you now request confirmation of your

opinion that —

1. The JVA between Greenfield and BPI for the development of the
Subject Property into a first class residential subdivision will not give
rise to a taxable joint venture as provided under Section 22 (B) in
relation to Section 27 (A) of the Tax Code of 1997;

2. The contributions of Greenfield and BPI of their respective resources

into the unincorporated joint venture for purposes of the development of
the Subject Property into a first class residential subdivision are not
subject to tax;

3. The allocation of the saleable lots of the Subject Property between

Greenfield and BPI after the issuance of the subdivided TCTs, as
stipulated in the JVA, is not a taxable event, and is not subject to
income tax and, subsequently, to withholding tax, Value-Added Tax
(VAT) and Documentary Stamp Tax (DST) since the allocation of the
saleable lots is conducted merely to facilitate the documentation of the
sales of the developed lots to third parties;

4. The sales to third parties of the developed lots registered in the name of
Greenfield (the Greenfield Lots) shall be subject to the regular corporate
income tax in accordance with Section 27 (A) of the Tax Code of 1997
and consequently, to withholding tax at the rate of 5% provided under
Revenue Regulations No. 2-98, as amended.

Furthermore, the sales of the Greenfield Lots to third parties will be

subject to DST in accordance with Section 196 of the Tax Code of
1997.

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 Finally, the sales of the Greenfield Lots which are below P1,500,000.00
(and below P2,500,000.00 for residential house and lots or other
dwellings) are exempted from VAT pursuant to Section 109 (P) of the
Tax Code, as implemented by Sections 4.1006-3 and 4.109-2 of
Revenue Regulations No. 16-2005, as amended by Revenue
Regulations No. 4-2007. On the other hand, sales of the Greenfield Lots
(or residential house and lots, if any) that are above the foregoing
thresholds shall be subject to VAT at the rate of 12% based on the
consideration stated in the sales document or the fair market value,
whichever is higher, in accordance with Sections 106 and 109 of the
Tax Code; HASDcC

5. The sales to third parties of the developed lots registered in the name of
BPI (the BPI Lots) shall be subject to regular corporate income tax in
accordance with Section 27 (A) of the Tax Code of 1997 and
consequently, to withholding tax at the rate of six percent (6%) under
Section 2 (b) of Revenue Regulations No. 7-2003.

Furthermore, the sales of the BPI Lots to third parties shall be subject to
DST in accordance with Section 196 of the Tax Code.

However, the sales to third parties of the BPI Lots shall not be subject to
VAT since under Section 121 of the Tax Code of 1997, as implemented
by Section 3 of Revenue Regulations No. 9-2004, the tax to be imposed
on a bank on its income from the exchange of real property shall be the
gross receipts tax; and

6. The allocation of the 60%-40% net proceeds on the sales of the saleable
lots in favour of Greenfield and BPI, respectively, is not a taxable event,
and is not subject to income tax and, subsequently, to withholding tax,
VAT and DST since the allocation of the net proceeds is a mere return
of capital that each party to the JVA has contributed.

In reply thereto, please be informed that your opinion is hereby confirmed as

follows —

1. Section 22 (B) of the Tax Code of 1997 provides that 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

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 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." (underline supplied)

Pursuant to the above-quoted provision, the term "corporation" was defined as

not to include joint venture formed for the purpose of undertaking construction
projects, as amended by Presidential Decree No. 929. As such, this Office holds that
the JVA formed by and between Greenfield and BPI is not treated as a corporation
under Section 22 (B) of the 1997 Tax Code, as amended, subject to the corporate
income tax under Section 27 (A) of the same Code and not required to file quarterly
and final or adjusted/income tax returns. (BIR Ruling No. DA-(JV-027)-211-08 dated
September 12, 2008; BIR Ruling No. DA-065-08, February 1, 2008) DTIaCS

However, the co-venturers are separately subject to the regular corporate

income tax on their taxable income during each taxable year respectively derived by
them from the aforesaid construction project. [BIR Ruling No. DA-(JV-009)-025-08
dated July 10, 2008; BIR Ruling No. DA-(JV-002)-009-08 dated July 7, 2008; BIR
Ruling No. DA-338-08 dated June 3, 2008; BIR Ruling No. DA-337-08 dated June 3,
2008; BIR Ruling No. DA-319-08 dated May 27, 2008; BIR Ruling No. DA-065-08
dated February 1, 2008; BIR Ruling No. DA-004-08 dated January 9, 2008]

2. The contribution by BPI and Greenfield of their respective parcels of land

to the joint venture is not subject to withholding tax since the conveyance of the
parcels of land is a capital contribution to the joint venture and, therefore, is not a
taxable event that will give rise to the payment of the creditable withholding tax.

Likewise, the transfer of land by BPI and Greenfield is not subject to VAT.
This is so because by contributing the parcels of land, the parties to the joint venture
neither sell, barter, exchange goods, property nor render services. Section 105 of the
Tax Code of 1997, provides that only a 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. Since by contributing the land to form
part of the capital of the joint venture, there was no disposition akin to sale, barter and
exchange of goods. Consequently, the transfer of Land by BPI and Greenfield is not
subject to VAT.

Moreover, Section 185 of Regulations No. 26 provides that "conveyances of

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 realty not in connection with a sale, to trustees or other persons without consideration
are not taxable." Accordingly, since the JVA is done without consideration and not in
connection with a sale between Greenfield and BPI, no DST is due and collectible
thereon. However, the notarial acknowledgment of the said document shall be subject
to the P15.00 DST pursuant to Section 188 of the Tax Code of 1997, as amended.

Furthermore, Section 3.2 of Article III of the JVA, provides that Greenfield, as
its contribution to the joint venture, shall develop, market and sell the Subject
Property into a first-class residential subdivision. Thus, the performance by
Greenfield of the developmental works specified in the JVA, being its capital
contribution in the form of services and skills, shall likewise be not subject to income
tax, VAT and DST. (BIR Ruling No. 187-82 dated June 3, 1982)

3. The allocation of the developed saleable subdivision lots within the

Subject Property between Greenfield and BPI is not subject to income tax and
withholding tax. Since the allocation of lots is done without monetary consideration
and made for purposes of the acknowledgment and confirmation of title and
ownership, it does not result in any gain or income and shall have no income tax
liability. The eventual transfer of the TCTs in the respective names of Greenfield and
BPI is but a mere formality, hence, not a taxable event. aCcADT

Furthermore, under Section 105 of the Tax Code of 1997, as amended, the
allocation of the developed subdivision lots is not subject to VAT since such is not
pursuant to a sale, barter, or exchange of goods and property. In the same vein, the
allocation is not subject to DST since it does not result in a contract of sale over real
property nor an instrument which conveys title to real property.

4. Sales of the Greenfield Lots to third parties shall be subject to the regular
corporate income tax under Section 27 (A) of the Tax Code of 1997, as amended, and
consequently, subject to withholding tax of five percent (5%) under Revenue
Regulations No. 2-98, as amended.

The sales of the Greenfield Lots to third parties shall be subject to DST at the
rate of Fifteen pesos (P15.00) for each One thousand pesos (P1,000), or fractional part
thereof in excess of One thousand pesos (P1,000), based on the total amount of
consideration or the fair market value, whichever is higher, in accordance with
Section 196, supra.

However, the sales of the Greenfield Lots to third parties which are below
P1,500,000.00 (and below P2,500,000.00 for residential house and lots or other
dwellings) are exempt from VAT pursuant to Section 109 (P) of the Tax Code of
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 1997, as amended by RA No. 9337, as implemented by Revenue Regulations No.
16-2005. Accordingly, all sales exceeding the above thresholds shall be subject to
VAT.

This is fortified in BIR Ruling No. DA002-08 dated January 8, 2008, where
this Office ruled that —

"Inasmuch as CCC is primarily engaged in the development and sale

of residential units, almost all of which have an average selling price of Two
million five hundred thousand pesos (P2,500,000.00), we now ruled as
follows:

1) Sale of lot valued for not more than One million

five hundred thousand pesos (P1,500,000.00) shall be exempt
from VAT;

2) Sale of house and lot values for not more than

Two million five hundred thousand pesos (P2,500,000.00)
shall be exempt from VAT.

Accordingly, all sales exceeding the above thresholds shall be subject

to VAT." CDAcIT

5. Section 2 (b) of Revenue Regulations No. 7-2003 provides that real

properties acquired by banks through foreclosure sales are considered as ordinary
assets, although banks shall not be considered as habitually engaged in the real estate
business for purposes of determining the applicable tax rates of withholding tax.
Consequently, the sales of the BPI Lots shall be subject to the creditable withholding
tax of 6%.

Moreover, the deeds of sale and conveyances of real property executed over
the BPI Lots shall be subject to DST under Section 196 of the Tax Code of 1997, as
amended.

However, the sale of the BPI Lots shall not be subject to VAT. Section 121 of
the Tax Code of 1997 provides —

"SEC. 121. Tax on Banks and Non-Bank Financial Intermediaries

Performing Quasi-Banking Functions. — There shall be collected a tax on
gross receipts derived from sources within the Philippines by all banks and
non-bank financial intermediaries in accordance with the following schedule:

xxx xxx xxx

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 (c) On royalties, rentals of property, real or personal,
profits, from exchange and all other items treated as gross
income under Section 32 of this Code — 7%

xxx xxx xxx"

Corollarily, Section 3 of Revenue Regulations No. 9-2004, implementing Section

121, supra provides that —

"SEC. 3. Imposition of Gross Receipts Tax (GRT) on Banks and

Non-Bank Financial Intermediaries Performing Quasi-Banking Functions. —
There shall be collected on gross receipts from sources within the Philippines
by all banks and non-bank financial intermediaries performing quasi-banking
functions in accordance with the following schedule:

xxx xxx xxx

(c) On royalties, rentals of property, real or personal,

profit from exchange and all other items, treated as gross
income under Section 32 of the Code — 5% [now 7%]." AaSTIH

xxx xxx xxx"

It is undisputed that the tax to be imposed on bank transactions involving

exchange of real or personal property shall be the gross receipts tax. This is justified
in BIR Ruling No. DA-(FIT-005) 176-08 dated August 27, 2008, where this Office
ruled that —

"From the afore-quoted provisions of Section 121 of the Tax Code of

1997 and Section 3 of Revenue Regulations No. 9-2004, it can be inferred that
the tax to be imposed on banks and non-bank financial intermediaries
performing quasi-banking functions with regard to their profit from exchange
of real or personal property and gains from dealings in property, shall be the
gross receipts tax.

In the instance case, the gain from the sale of the subdivision lots that
will be derived by BDO is clearly subject to the gross receipts tax considering
that BDO is a bank and said sale falls within the purview of Section 121 (c) of
the Tax Code of 1997, which explicitly provides that profits from exchange
and all other items treated as gross income under Section 32 of this Code shall
be subject to the gross receipts tax of seven percent (7%), which necessarily
includes the sale or exchange of real or personal property owned by banks.

Accordingly, this Office hereby confirms your opinion that the gain or
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 income arising from the sale or exchange of subdivision lots by BDO in
favour of CAPI is not subject to VAT, but to the gross receipts tax of 7%
pursuant to Section 121 of the Tax Code of 1997, as amended."

Accordingly, prescinding from the above-cited ruling, it is undisputed that

since BPI is a bank, the sale of the BPI Lots shall not be subject to VAT but to the
gross receipts tax.

6. The return to the parties of the proceeds of the sales of the Saleable Lots
in the Subject Property, based on their allocation of 60%-40% in favour of
Greenfield, is not a taxable event and thus, not subject to income tax and
consequently to withholding tax, VAT and DST because the allocation is a mere
return of capital that each has contributed. In BIR Ruling No. DA086-07 dated
February 13, 2007, this Office ruled that —

"The share in the net proceeds distributed to the respective joint

venture partners is not subject to VAT anymore. The distribution of the share
in the net proceeds is just a mere return of capital that each co-venturer has
contributed to the JVA. (BIR Ruling No. DA-211-2000 dated April 4, 2000).
However, it is noted herein that in the course of the initial marketing and sales
of the perpetual use of the memorial lots by SOPBI, a value-added tax shall be
imposed already. Since the 12% VAT that will be imposed therein is for the
account of SOPBI, SOPBI therefore will be entitled to the input taxes accrued
in the said joint venture project. HTaSEA

xxx xxx xxx

The share in the net proceeds distributed to the respective joint venture
partners is not subject to the expanded withholding tax, the same being a mere
return of capital that each co-venturer has contributed to the JVA (BIR Ruling
No. DA-057-2003 dated January 21, 2003). . . . . Moreover, SOPBI shall
declare as part of its income the 3% marketing fee, 2% management fee and
18% commission based on the gross market price per memorial lot sold. The
3% marketing fee, 2% management fee and 18% commission based on the
gross market price per memorial lot sold are likewise subject to the
withholding tax imposed on income payments made to juridical persons
prescribed under Revenue Regulations No. 2-98, as amended, at the rate of
10%."

Pursuant to the said ruling, Greenfield shall also declare as part of its income
the Sales Service Fee, the Marketing Service Fee and Management Service Fee on all
Saleable Lots sold by Greenfield. These fees are likewise subject to the withholding
tax imposed on income payments made to juridical persons prescribed under Revenue
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 Regulations No. 2-98, as amended, at the rate of 10%.

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 JVA, without
need of the presentation of proof of payment of the expanded 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 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 JVA. 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) DEHaTC

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.) GREGORIO V. CABANTAC

Deputy Commissioner
Legal & Inspection Group
Bureau of Internal Revenue

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