Angara Abello Concepcion Regala & Cruz

January 16, 2007 BIR RULING [DA-017-07] Sec. 22 (B); Sec. 27 (A); DA-470-04 Angara Abello Concepcion Regala & Cruz ACCRA Building 122 Gamboa St., Legaspi Village Makati City Attention: Atty. Aison Benedict C. Velasco Gentlemen : This refers to your letter dated December 29, 2006 requesting on behalf of your client, Timog Silangan Development Corporation ("TIMOG"), confirmation of your opinion as follows: ECSaAc 1) The terms of the Development Agreement between TIMOG and GLOBE Asiatique Realty Holdings Corporation ("Globe Asiatique") do not give rise to a separate taxable joint venture pursuant to Section 22(B) of the 1997 Tax Code, as amended; and 2) The allocation and distribution of saleable lots of TIMOG and Globe Asiatique in the project pursuant to the development agreement, and the execution of the partition agreement in accordance therewith to implement such allocations, are not taxable events and therefore are not subject to income/creditable withholding tax, value-added tax and documentary stamp tax. cAIDEa The facts as represented are as follows: TIMOG is the registered owner of certain parcels of land located at Timog Silangan, Barangay Pampang, Angeles City, with an aggregate total area of two hundred thousand seven hundred seven (200,727) square meters, more or less, presently covered by several Transfer Certificates of Title issued by the Registry of Deeds for Angeles City (collectively referred to as the "Properties", listing of which is hereby attached as Annexes "A-1 to A-15" and made as an integral part of this Ruling). Globe Asiatique, on the other hand, is an entity which will finance and develop the Properties into a residential subdivision with a commercial strip (the "Project"). On December 22, 2006, TIMOG and Globe Asiatique entered into a Development Agreement whereby they agreed to form an unincorporated joint venture for the purpose of developing the Properties. The capital contributions of the parties are as follows: a) Globe Asiatique will provide financing, planning, designing, marketing, construction, development, management and general operation of all the facets of the Project and b) TIMOG will contribute the Properties for the Project. After the development of the Project and in return for their investments, the parties will receive the following: a) Eighty percent (80%) of the saleable lots in the Project will go to Globe Asiatique; and b) Twenty percent (20%) of the saleable lots in the Project will go to TIMOG. In reply, please be informed as follows: Section 22 (B) of the 1997 Tax Code, 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. '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) 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, 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. SEAHID From the foregoing, the joint venture created by and between TIMOG, the landowner, and Globe Asiatique, the developer, therefore, is not subject to the income tax imposed under Section 27 (A) of the Tax Code of 1997, as amended. ( BIR Ruling No. DA-470-04, dated September 7, 2004) On the issue of the allocation of the saleable lots between TIMOG and Globe Asiatique, it is the opinion of this Office that said allocation, which is done effectively in consideration of their respective contributions, does not constitute a taxable event, as no income is actually realized by either the TIMOG and/or Globe Asiatique. The Partition Agreement will be executed without consideration, and is not 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 mere return of capital ( Section 36, RR No. 2 ). TIMOG and Globe Asiatique, both having contributed to the development of the aforementioned real properties, did not realize any income upon the allocation of the saleable lots. Hence, the allocation of lots which will arise from the execution of a Partition Agreement is not subject to income tax, and consequently, to withholding tax. The said allocation, likewise, is not subject to VAT. TIMOG and Globe Asiatique will only realize income upon their respective sales of the saleable lots allocated to each of them. In this regard, said sales by TIMOG and Globe Asiatique, would be subject to regular (corporate) income tax at 35%, in accordance with Section 27 (A) of the Tax Code, as amended, and consequently to withholding tax as implemented under Revenue Regulations (RR) No. 2-98, as amended. Said sales, likewise, are subject to VAT. Further, when TIMOG and Globe Asiatique will allocate unto each other their share in the saleable lots in consideration of their respective contributions, the document for said allocation shall not be subject to the DST imposed under Section 196 of 1997 Tax Code, as amended, considering that 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 planned Partition Agreement to be executed shall be entered into without consideration, and shall not be in connection with a sale between TIMOG and Globe Asiatique, no DST is due and collectible on said future Partition Agreement. However, the notarial acknowledgment to said Partition Agreement shall be subject to the DST pursuant to Section 188 of the Tax Code, as amended, in the amount of P15.00. This will authorize the Revenue District Officer (RDO) of the revenue district where the properties are located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the transfer of the saleable lots to TIMOG and Globe Asiatique based on their respective allocations without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax and value added tax. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service