Ayala Land, Inc.

February 29, 2008 BIR RULING [DA-116-08] Ayala Land, Inc. Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue Makati City Attention: Atty. Ma. Carlota Christina G. Laino-Santiago Legal Counsel Gentlemen : This refers to your letter dated December 5, 2007 stating that Ayala Land, Inc. is a corporation duly organized and existing under the laws of the Philippines and engaged in the development of real estate; that on the other hand, CECI Realty, Inc. (CECI) is the lawful and beneficial owner of certain parcels of land located in Barangays Sto. Domingo and Don Jose, Sta. Rosa, Laguna, with an aggregate areas of approximately 700,000 square meters covered by TCT Nos. T-233087, T-549930, and T-233090 issued by the Registry of Deeds for Calamba, Laguna; that on November 9, 2007, CECI and ALI (Parties) entered into a Joint Development Agreement (the Agreement) to jointly undertake the development of the property into a residential subdivision consisting of Developed Lots and corresponding open spaces to be sold in Phases; that for the purpose of undertaking the development of the Project, ALI shall undertake or cause to be undertaken, the design and planning of the intended development of the Property, the subdivision thereof into several parcels of land to constitute a Phase and/or a subdivision lot, the design and construction of the internal road network, open space, infrastructure and facilities of the development, the planning, design and specifications of each Phase including any components thereof, and the allocation of the Developed Lots to the Parties in return for their respective contributions; that the Agreement consists of the planning and development of the Property into a residential subdivision, which shall be subdivided into Developed Lots and Common Areas for the benefit of the residents and occupants, and shall include the master planning of the intended project, land development and design of all phases of the Project, and the marketing and sale of the Developed Lots pursuant to the terms and conditions specified herein; that the summary of terms of the Agreement is as follows: (a) CECI shall contribute the Property (and all its rights, title and interest in, and to, the Property) that will constitute the entire area of the Project; (b) ALI shall contribute the necessary expertise for the construction and development of the Project and shall undertake the actual construction and development of the Project; (c) Prior to the sale of any Developed Lot to third parties, the Parties shall share in the distribution of the Developed Lots in each Phase constituting part of the Project proportionate to their respective contributions. cTDIaC Accordingly, Section 3.1 of the Agreement on the determination of the Allocation of Developed Lots to each Party provides: Return of Contributions. In return for their respective contributions to the Project, the parties shall receive their respective Allocations as follows: (i) Subject to the conditions set forth in Section 3.1 (c), CECI Shall receive an Allocation with an aggregate Reference Value not exceeding the amount computed as follows: caCTHI RVCECI = RVALI x OVCECI Where: RVCECI = the Reference Value of CECI's Allocation; RVALI = the total Reference Value of all Developed Lots in the Project; OVCECI = the applicable rate of CECI's override, which is 25% for the first 175,000 square meters of the Developed Lots in the Project. (ii) On the other hand, ALI shall receive an Allocation with an aggregate Reference Value equal to the difference between the aggregate Reference Value of all the Developed Lots and the aggregate Reference Value of CECI's Allocation. (iii) The override rate of CECI (OVCECI) of 25% for the Second Phase of Selling shall be adjusted upwards depending on the velocity of the sales of the Developed Lots during the First Phase of Selling, and in any event upon the lapse of a period of twenty-six (26) months from the date the first phase of the Project is launched or the date the Developed Lots in the first phase of the Project are offered for sale to the public. For purposes of this Section, the First Half of Selling shall be defined as the selling of the first fifty percent (50%) of the total Developed Lots in the first Phase of the Project, which is equal to 175,000 square meters of Developed Lots, while the Second Half of the Selling shall refer to the selling of the remaining fifty percent (50%) of the total Developed Lots in the First Phase of the Project, amounting to 175,000 square meters. Thus, OVCECI during the Second Half of Selling shall be increased to 28% in the event that at least 175,000 square meter of Developed Lots are sold to third parties within 26 months from the date the first phase of the Project is launched for sale of Developed Lots to the Public. However, if less than 175,000 square meters of Developed Lots is sold within such 26-month period, OVCECI applicable for the Second Half of Selling shall be adjusted using the following formula: OVCECI = [(X/100) x 3%] + 25% Where: X = the percentage that the aggregate area of Developed Lots actually sold to third parties within the 26-month period bears to 175,000 square meters, provided that in no case will X ever exceed 100% of 175,000 square meters. Provided that, in any case, the adjusted rate shall apply only for the Second Half of Selling of Developed Lots, and shall in no event apply to the First Half of Selling of Developed Lots or balance thereof remaining unsold. (d) The actual distribution to the Parties of the Developed Lots as their respective allocations shall be effected through the execution of a separate Deeds of Partition, which the Parties shall execute without monetary consideration. Prior to the execution of the Deeds of Partition, the Parties shall have a prorated interest in the Project on the basis of the pro rata allocation described above. (e) After distribution of the respective allocations specified, the Parties shall respectively maintain separate ownership of such allocated Developed Lots. Each Party may sell or transfer the Developed Lots to third parties independently of the other, and without pooling their profits and resources with the other party. Based on the foregoing representations, you now request confirmation of your opinion that 1. The joint venture whereby CECI will contribute the Property and ALI will contribute the necessary expertise for the construction and development of the Project and perform all the development work for the Project into a residential subdivision does not give rise to 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 the respective shares of the Parties 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, the value-added tax under Section 106 of the Tax Code, and the documentary stamp tax under Section 196 of the Tax Code, because allocation is a mere return of capital that each of the Parties has contributed to the Project; aAHSEC 3. The Deeds 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; 4. In accordance with the provisions of Presidential Decree No. 957, and then rules and regulations implementing the same, in the event of conveyance by ALI of the Property and its registration in the name of the Homeowner's Association upon completion of the Project is not a taxable event and not subject to corporate income tax, VAT or documentary stamp tax. Consequently, the confirmation of this request will authorize the Revenue District Officer of the revenue district where the Parcel is located to issue the corresponding Tax Clearance Certificate with regard to the transfer of the title to the Property in the name of the Homeowner's Association upon completion of the Project, without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax, and VAT; and 5. In the event, however, that any of the Parties shall subsequently sell their respective shares consisting of Developed Lots, such sale shall be subject to the regular corporate income tax under Section 27 (A) of the Tax Code and the creditable withholding tax under Revenue Regulations No. 2-98, VAT imposed under Section 106, and documentary stamp tax imposed under Section 196, supra . In reply thereto, 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. HTDAac 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 legislature to exclude joint venture or consortium formed for the purpose of undertaking construction projects from the definition of taxable corporation, this Office holds that the Agreement entered into by CECI and ALI 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. 2. The allocation and distribution of the respective shares of the Parties in the Project consisting of Developed Lots in consideration of their respective contributions, as stipulated in the 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. 3. The Deeds 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 is not subject to value-added tax under Section 106 of the Tax Code of 1997, as amended by Republic Act No. 9337, as implemented by Revenue Regulations No. 16-2005, income tax/creditable withholding tax under Revenue Regulations No. 2-98, as amended, and to the corresponding documentary stamp tax prescribed in Section 196 of the Tax Code of 1997, as amended. 4. The conveyance by ALI and registration of the Property in the name of the Homeowner's Association upon completion of the Project is not a taxable event and not subject to corporate income tax, value-added tax and documentary stamp tax. Accordingly, this will authorize the Revenue District Officer of the revenue district office where the Property is located to issue the corresponding Certificate Authorizing Registration (CAR) or Tax Clearance Certificate (TCL) with regard to the transfer of the title to the Property in the name of the Condominium Corporation upon completion of the Project, without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax and value-added tax. TcSICH 5. However, upon subsequent sale by the Parties of their respective shares consisting of Developed Lots, the gain that may be realized by them from such sale will be subject to the regular corporate income tax under Section 27 (A) and to the creditable withholding tax under Revenue Regulations No. 2-98, as amended, and to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, and to the value-added tax imposed under R.A. No. 9337, as implemented by Revenue Regulations No. 16-2005, unless exempt under Section 109 (w), supra . (BIR Ruling Nos. 274-92 dated September 30, 1992; 010-96 dated January 23, 1996; BIR Ruling Nos. DA065-97 dated February 10, 1997; DA286-98 dated June 29, 1998) Finally, the joint venture or the party who undertakes the development of the project shall file an Annual Information Return and other returns required to be filed with the RDO where it is registered or required to be registered. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service