BIR Ruling [DA-026-02]

February 21, 2002 BIR RULING [DA-026-02] Ayala Land, Inc. Tower One, Ayala Triangle Ayala Avenue Makati City Attention: Atty. Sheila Marie L. Uriarte-Tan Director Manager-Legal Department Gentlemen : This refers to your letter dated January 7, 2001 stating that Fern Realty Corporation (Fern) is a corporation duly organized and existing under Philippine laws and is the registered owner of certain Fern Property of land with an aggregate area of approximately 85,859 square meters located in Bgy. Pasong Tamo, Quezon City consisting of (a) a parcel of land under Transfer Certificate of Title (TCT) No. N-196011 of the Register of Deeds of Quezon City (Fern Parcel), and (b) those parcels of land under TCT Nos. N-191768, N-223131, N-227677, N-227675, N-182162, N-182120, N-182786, N-182159, N-182119, N-227878, N-182041, N-183630, N-188382, N-183632, N-183618, N-189582, N-189584, N0-182698, N-182161, N-188374, N-182163, N-182750, N-181113, N-182158, N-182122, N-182121, N-227674, N-188351, N-189583, N-198273, N-198293, N-68733, N-182037, N-182036, N-50893, N-182785, N-182699, N-228437, N-188352, N-191329, N-298392, N-191766, N-182042, N-179708, N-189585, N-179713, N-179712, N-198292, N-179714, N-179709, N-179718, N-179719, N-180801, N-179715, N-198390, N-198272, N-179720, N-179717, N-206645, T-321346, N-179716, N-182700, 150842 of the Register of Deeds of Quezon City (Linkage Parcels), both the Fern Parcel and the Linkage Parcels being hereinafter referred to as the Fern Property; that Ayala Land, Inc. (ALI), on the other hand, is a corporation duly organized and existing under Philippine laws and is engaged in the development of real estate; that on September 25, 2001, Fern and ALI entered into a Joint Development Agreement (the Agreement), for the joint development of the Fern Property into Phase 4 of Ferndale Homes, a high-end residential community in Bgy. Pasong Tamo, Quezon City (the Property); that the Project consists of the planning, construction and development of the Fern Property into Phase 4 of Ferndale Homes and the marketing and sale of developed lots located therein (salable developed lot being referred to as a Developed Lot) that the specific terms of the Agreement are as follows: (a) Fern shall contribute the Fern Property (and all its rights, title and interest in and to the same) that will constitute the entire area of the Project. (b) ALI shall contribute the necessary cash for the construction and development of the Project, perform all the development work for the Project, as well as be credited for its contribution of 55% of the purchase price paid for by Fern for the purchase of the Linkage Parcels. (c) In consideration of, and in return for, their respective contributions to the Project, Fern and Ali shall share in the distribution of the Developed Lots comprising the Project proportionate to their respective contributions. Thus: (1) to Fern shall be allocated and Fern shall receive: (i) such number of Developed Lots with an aggregate Reference Value (defined as the Peso value to be assigned to a Developed Lot determined by ALI to be the most suitable for such Developed lot, equal to the selling price that a buyer will be required to pay if he was to purchase such Developed Lot on a deferred payment basis) not exceeding the amount computed as follows: RV Fern = RV Fern parcel + RV Linkage Where: RV Fern = the Reference Value of Fern's Allocation RV Fern Parcel = that component of the Reference Value of Fern's Allocation pertaining to the contribution by Fern of the Fern Parcel which is equal to: 45% x V x (F x 60.11%) M S where: V = agreed value per square meter of the Fern Parcel which is equal to P9,750.00; F = area of the Fern Parcel; M = management fee due to ALI; S = cost of complying with the socialized housing requirement for the Project pursuant to Republic Act No. 7279; RV linkage = that component of the Reference Value of Fern's Allocation pertaining to the contribution by Fern of the Linkage Parcels which is equal to: 45% x [V x (L x 60.11%) - D] where: V = agreed value per square meter of the Fern Parcel which is equal to P9,750.00; L = total area of the Linkage Parcels; D = development cost of the Project consisting of: (a) land development and construction cost; (b) cost of complying with the socialized housing requirement for the Project pursuant to Republic Act No. 7279; (c) ad and promo expenses; (d) marketing fee of ALI; (e) costs and expenses for obtaining licenses, fees and other permits relating to the conduct of the development of the project; (f) real property taxes due on the Fern Property during the period of development and prior to the sale of the Developed Lots to the buyers and the annotation of the perpetual right of way easement over the road lots, easements and open spaces in Phase 4 of Ferndale Homes for the benefit of the residents of Ferndale Homes on the transfer certificates of title thereof; and (g) other related costs and expenses for the development; provided that, D shall not in any event exceed 32.88% of the Total Reference Values of all the Developed Lots; (ii) all road lots, easements and open spaces in the Project, subject to the condition that Fern shall grant a perpetual right of way easement through such roads for the benefit of all the residents of Ferndale Homes and their guests and shall allow residents of Ferndale Homes perpetual use and enjoyment of all such open spaces and easements. (2) to ALI shall be allocated and ALI shall receive such number of Developed Lots with an aggregate Reference Value equal to the difference between the aggregate Reference Value of all Developed Lots in the Project and the aggregate Reference Value of Fern's allocated Developed Lots. IHDCcT (d) The Parties shall select the Developed Lots to represent their respective allocations. The actual distribution to the Parties of the Developed Lots received pursuant to their respective allocations shall be effected through the execution of a Deed of Partition which the Parties will execute without monetary consideration for each sub-phase of the Project. Prior to the execution of a Deed Partition, however, the Parties shall have a prorated interest in the Project (or a sub-phase thereof, as applicable). (e) After distribution of the Fern Property, the Parties shall maintain separate ownership of their allocated Developed Lots and may sell or transfer their respective Developed Lots to third parties. Based on the foregoing representations, you now request confirmation of your opinion that "1. The Joint venture whereby Fern will contribute the Fern Property and ALI will contribute the cash for the development of the Fern Property into a residential subdivision, and other development work, does not give rise to a taxable joint venture, hence, is not subject to corporate income tax pursuant to Section 22(B) in relation to Section 27(A) of the Tax Code; "2. The allocation and distribution of their respective shares in the Project consisting of Developed Lots in consideration for their respective contributions to the joint venture is not a taxable event, hence, is not subject to the regular corporate income tax under Section 27(A) of the Tax Code, nor creditable withholding tax under Revenue Regulations No. 2-98, nor the value-added tax under Section 106 of the Tax Code, because the allocation is a mere return of capital that each of the Parties has contributed to the Project; "3. The Deed of Partition to be executed by the parties whereby they allocate and distribute between them their respective shares in the Project in exchange for their respective contributions is without monetary consideration, hence, is not subject to value-added tax under Section 106 of the Tax Code, income/creditable withholding tax under Revenue Regulations No. 2-98, and the documentary stamp tax under Section 196 of the Tax Code; and "4. Consequently, the confirmation of this request will authorize the Revenue District Officer of the revenue district where the properties are located to issue the corresponding Tax Clearance Certificate with regard to the transfer of the titles to the lots to be received by ALI and Fern based on their respective allocations pursuant to the Deed of Partition without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax, and value-added tax." In reply, please be informed that your opinion is hereby confirmed as follows: 1. Pursuant to Section 22(B) of the Tax Code of 1997, 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. It is to be emphasized, however, that P.D. 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 not be considered an additional income tax lien. Considering that it is the intention of the legislative to exclude joint venture or consortium formed for the purpose of undertaking construction projects from the definition of taxable corporation, this Office is of the opinion as it hereby holds that the Joint Development Agreement entered into by Fern and ALI for the development of the Fern Property into Phase 4 of Ferndale Homes, a high-end residential community is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997. 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. Moreover, the Joint Development Agreement entered into by and between Fern and ALI is subject to the documentary stamp tax of P15.00 imposed under Section 188 of the Tax Code of 1997. However, the sale of the said real property shall be subject to the documentary stamp tax under Section 196 of the said Code. 2. The allocation and distribution of their respective shares in the project consisting of developed lots and the housing structures built thereon in consideration of their respective contributions, as stipulated in the Joint Development Agreement is not a taxable event and is not subject to income tax, withholding tax, value-added tax and documentary stamp tax because the allocation is a mere return of capital that each has contributed. ( BIR Ruling Nos. 10-96 dated January 23, 1996; DA065-97 dated February, 10, 1997; DA286-98 dated June 29, 1998 ) 3. Since the Deed of Partition to be executed by the parties allocating and distributing between them their respective shares in the project in exchange for their respective contributions is without monetary consideration but merely acknowledges and confirms the title and ownership of Fern and ALI, the same is not subject to the value-added tax, income/creditable withholding tax nor to the documentary stamp tax respectively imposed under Sections 106, 27(A) as implemented by Revenue Regulations No. 2-98 and 196 all of the Tax Code of 1997. 4. 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 titles to the lots to be received by ALI and Fern based on their respective allocations pursuant to the Deed of Partition 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.) MILAGROS V. REGALADO Acting Assistant Commissioner Legal Service