Guzman Cruzat & Ramirez

February 13, 2007 BIR RULING [DA-086-07] Sec. 22 (B), joint venture; DA-018-2006 Guzman Cruzat & Ramirez Unit 7L, Vemida I Condominium Amorsolo Street, Legaspi Village Makati City Attention: Atty. Michael C. Ramirez Gentlemen : This refers to your letter dated February 15, 2007 requesting on behalf of your client, Step One Property Builders, Inc. (" SOPBI "), for a ruling concerning its intended joint venture transaction with Ricor Essential Properties, Inc. ("RICOR") formerly Rizal Memorial Park Developers, Inc. The facts, as represented, are as follows: SOPBI is a realty and developer corporation with office address at 9/F, Vicente Madrigal Building, Ayala Avenue, Makati City. SOPBI intends to enter into a joint venture agreement (JVA) with RICOR. In accordance with the proposed JVA, SOPBI agrees to develop, market and sell the property owned by RICOR. The property shall be developed by SOPBI into memorial lots and it shall be responsible in marketing and selling of the perpetual use of the same in accordance with the agreed marketing and management scheme devised for such purpose. As SOPBI has agreed to undertake the task of selling the perpetual use of the memorial lots, it therefore assumes the responsibility of issuing the sales documents (including the official receipts), accepting payments and payments of all costs and expenses related to the development, marketing and sales thereof, including the payment of the 12% value-added tax (VAT), 3% marketing ads promo, 2% management fee and 18% commission. The above percentage shall be based on the agreed or gross market price per memorial lot sold. In undertaking all these tasks, SOPBI will receive a 3% marketing fee, 2% management fee and 18% commission. All expenses shall be taken into account and deducted from the gross revenue after which the net proceeds will be divided equally between SOPBI and RICOR. HDAaIc On the other hand, SOPBI will collect from the prospective buyers of the perpetual use of the memorial lots a certain amount which shall form part of the "Perpetual Care Fund", to be held in trust by SOPBI and which shall be utilized for the upkeep of the memorial park. Further, SOPBI and RICOR agreed that upon termination and/or expiration of the JVA, the unsold units shall be distributed to them at 50-50 percentage. In connection therewith, SOPBI posits the following queries: 1) Is the share of the net proceeds distributed to the respective joint venture partners still subject to VAT considering that the gross revenue will be subjected to said tax already in the course of the initial marketing and sales of the perpetual use of the memorial lots by SOPBI? 2) Is the share of the net proceeds distributed to the respective joint venture partners subject to the expanded withholding tax? 3) Is the "Perpetual Care Fund" held in trust by SOPBI to answer for the upkeep of the memorial park subject to any tax? 4) Is the distribution of the unsold units to the respective joint venture partners subject to income/withholding tax and VAT? In reply, please be informed that your queries are answered as follows: 1) 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. ADSTCa 2) 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). Likewise, the sale of the perpetual use of the memorial lots by SOPBI to prospective buyers is not subject to the creditable withholding tax imposed under Revenue Regulations No. 2-98, as amended. The transactions subject to the withholding tax scheme as enumerated in the Regulations are exclusive. Since the sale of the right to perpetual use of the memorial lots is not among those enumerated in the Regulations, said sale therefore, is not subject to the withholding tax. However, SOPBI and RICOR are required to declare the income they derived in the sale of the right to perpetual use of the memorial lots in the manner a corporate taxpayer reports its income. 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%. aSEDHC 3) The "Perpetual Care Fund" held in trust by SOPBI to answer for the upkeep of the memorial park is not subject to any tax. The said account is just a pool of the contributions given by the prospective buyers to be utilized in the maintenance of the memorial park. These contributions from the respective buyers are merely held in trust and used solely for administrative expenses in order to provide maintenance of the memorial park. However, if SOPBI receives a portion of the Perpetual Care Fund as a monetary consideration for managing such fund and as payment for rendering of services for the maintenance and management of the memorial park, SOPBI, in this case, derived monetary gain and such gain, therefore shall form part of its taxable income. aSIETH 4) The distribution of the unsold units to the respective joint venture partners is not subject to income/withholding tax and VAT. The distribution of the unsold units to the respective joint venture partners, which is done effectively in consideration of their respective contributions, does not constitute a taxable event, as no income is actually realized by either SOPBI and RICOR. The distribution will be done without any monetary consideration, and will not be in connection 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) . SOPBI and RICOR, both having contributed to the development of the aforementioned real property, did not realize any income upon the allocation of the unsold units. Hence, the distribution of units is not subject to income tax, and consequently, to withholding tax. The said allocation, likewise, is not subject to VAT. HDITCS SOPBI and RICOR will only realize income upon their respective sales of the unsold units distributed to each of them. In this regard, said sales to third parties, if ever undertaken, would be subject to regular (corporate) income tax at 35%, in accordance with Section 27 of the 1997 Tax Code, as amended. Likewise, said sale to third parties shall be subject to VAT. 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