Grand Monaco Estate Developers, Inc.

March 24, 2008 BIR RULING [DA-193-08] 27 (A); DA-097-2001 Grand Monaco Estate Developers, Inc. No. 49, Sta. Ana St., A. Tuazon Ave. San Roque, Marikina City Attention: Mr. Reynaldo A. Carpio President Gentlemen : This refers to your letter dated January 3, 2008 requesting for a ruling that (1) the joint development of 2-Storey multi-residential units of Grand Monaco Estate Developers, Inc. (Monaco) and Cesar C. Eribal, landowner, will not create a taxable joint venture within the meaning of Section 22 (B) in relation to Section 27 (A) of the National Internal Revenue Code of 1997 and (2) the allocation of their respective interests in the project and the execution of the Deed of Partition to implement such allocation, are not taxable events and are not subject to income/expanded withholding tax, value-added tax, capital gains tax, donor's tax and documentary stamp tax under Section 196 of the Tax Code. It is represented that Grand Monaco Estate Developers, Inc. is a corporation duly organized, operating and existing under the laws of the Republic of the Philippines with principal office address at No. 49, Sta. Ana Street, San Roque, Marikina City; that Monaco is engaged in the business of construction and real estate development; that Cesar C. Eribal is the beneficial owner of two (2) parcels of land at Brgy. Bagbag, Quezon City covered by TCT No. RT-82394 with an area of 1,922 sq.m. and TCT No. RT-82402 with an area of 1,000 sq.m. with an aggregate area of 2,922 sq.m.; that Monaco and Cesar C. Eribal entered into a Memorandum of Agreement for a joint development of said 2-storey multi-residential units; and that the parties agreed, viz.: "A. Undertakings and Responsibilities of the First Party (Monaco): HESCcA 1. The FIRST PARTY shall be responsible for the preparation of designs and plans of the proposed multi residential units and likewise the specifications for the improvements and facilities referred to herein duly signed and sealed by all the required respective professionals and shall also secure all necessary approvals and permits from the concerned authorities. The FIRST PARTY further agrees and commits itself to build and construct the multi-residential units and all the required facilities in accordance with the National Building Code and in the manner and according to the specifications mentioned in this Agreement. 2. The FIRST PARTY agrees to the relocation survey, subdivision survey and monumenting of lots, processing and segregating and titling of individual lots for all the lots subdivided as per approved plans; 3. The FIRST PARTY shall furnish the materials, labor, equipment, tools and engineering expertise for the land development aspect of the project such as the road network, fencing or perimeter, waterlines, drainage lines, electrical lines, landscaping and beautification of the project site; 4. The FIRST PARTY, has the sole and exclusive obligation to build and construct the multi residential units and all the facilities mentioned and must be within the period specified herein; 5. That the FIRST PARTY guarantees the completion of the projects within a period of Three (3) years upon release of construction permit by the Office of the building official. It is understood that the FIRST PARTY, as the DEVELOPER, shall extend its best effort to fully developed the property within the specified time. In the event of however of force majeure such as natural disaster, civil unrest, insurrections, general strikes, nationwide shortages of construction materials, runaway inflation (defined as an increase in the consumer price index by more than 15% per annum) and other legal impediment, the duration may be extended at a reasonable time to compensate whatever delays that may have been caused, subject to mutual arrangement by both parties; SacTCA 6. The FIRST PARTY expressly warrants that all the materials and other housing components that it will use for construction of the units shall be of good quality as per agreed specification and all the construction works shall uniformly comply with generally accepted principles in engineering and construction and it further warrants to secure all necessary certificates of completion or occupancy for all said units. 7. The responsibility of the FIRST Party is to complete the multi-residential units after which the maintenance of the project from the time of completion up to the time of turnover shall be covered by a management fund taken one (1%) percent from the proceeds of the sale. This fund is to be utilized to maintain the projects (roads, common areas, and unoccupied units). 8. The FIRST PARTY holds the right to appoint the marketing group, subject to a fees of twelve (12%) percent. This cover cost of promotion, commission, incentives and management. B. Undertakings and Responsibilities of the Second Party: 1. THAT, the SECOND PARTY warrants the validity and legality of the title and ownership of the above-mentioned property, free from all liens, restrictions and encumbrances whatsoever. The SECOND PARTY likewise assures its legal authority to enter agreement with the FIRST PARTY through a SPECIAL POWER OF ATTORNEY; 2. THAT the SECOND PARTY shall keep up to date the payment of real property taxes until and upon the assignment of lot shares for each of the parties. All other taxes emanating from land ownership dues shall be borne by the SECOND PARTY until upon the assignment of lot shares to both parties; 3. THAT the SECOND PARTY shall undertake to execute the required deeds (conveyance) or such other deed or documents to register the titles of the lots in their names or to the FIRST PARTY; 4. THAT the SECOND PARTY upon signing of this Agreement shall not sell, encumber or otherwise dispose of the properties herein mentioned to other parties without the knowledge and consent of the FIRST PARTY; TcCSIa 5. THAT the SECOND PARTY shall make available to the FIRST PARTY the land to be developed free from any tenants and/or illegal occupants, and shall insure peaceful and continuous possession of the land to facilitate the development of the properties and to execute and deliver to the FIRST PARTY the necessary documents required to subdivide the land and eventual titling for each of the lot to be developed; 6. THAT the SECOND PARTY acknowledges the FIRST PARTY'S rights to protect its investment interest by annotating at the back of the Original Titles, this Agreement which shall be duly registered by the Registry of Deeds of Quezon City; 7. That the SECOND PARTY warrant the existing Road Right of Way shall be permanent easement available for access to and free passage for the project site and the right of Way for the drainage line, water lines, power lines, as such, the SECOND PARTY guarantees perpetuity of usage as this is the only egress. Ingress available. C. Sharing The resulting gain in gross value shall be divided on a sharing ratio of seventy percent (70%) for the FIRST PARTY and thirty percent (30%) for the SECOND PARTY in such manner with the following further guidelines: C.1 That the parties shall sit down and determine their respective unit shares guided by the principle of fair sharing; C.2 Titles to lots assigned to the FIRST PARTY shall be released pro-rata as per work accomplishment. For the purpose of determining the percentage of accomplishment, the FIRST PARTY shall present a standard guide of construction to be mutually agreed upon; C.3 Upon the assignment of the lot shares to the parties, all land taxes shall be paid by the parties based on their sharing ratio, each party shall also be responsible for the payment of other taxes on his share; ScCIaA C.4 Should there be expenses other than the FIRST PARTY financial obligation as prescribed herein, the FIRST PARTY may at its discretion, extend assistance by way of professional services or cash advance in favor of the SECOND PARTY obligations of settling tax obligation, transfer of Title or among other as may be agreed upon. Such advances shall be repaid by the SECOND PARTY to the FIRST PARTY thru assignment of proportionate shares. In reply, please be informed that pursuant to Section 22 (B) of the Tax Code of 1997, the term "corporation" shall include partnerships, no matter how created or organized, joint stock companies, joint accounts (cuentas en participation), 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. Such being the case, the Joint Venture of Monaco and Cesar C. Eribal is not subject to the corporate income tax under Section 27 of the Tax Code of 1997. Consequently, gross payments received by said joint venture are not subject to the 2% expanded withholding tax prescribed under Section 57 (B) of the Tax Code of 1997 and implemented by Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 2-98. The allocation of saleable area of the project between Monaco and Cesar C. Eribal in consideration of their respective contributions, as stipulated in the Agreement is not a taxable event and is not subject to income tax or any withholding tax because the allocation is a mere return of capital that each has contributed. However, upon the subsequent disposition by the co-venturers of the areas allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax rates under Sections 24 and 27 (A) both of the Tax Code of 1997, as the case may be, and/or to the creditable withholding tax under Revenue Regulations No. 2-98, as amended. Furthermore, said sale shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 based on the gross selling price or fair market value of the property whichever is higher. Moreover, the said sale shall also be subject to value-added tax. AaSHED The Partition Agreement whereby Monaco and Cesar C. Eribal will allocate unto each other their share in the saleable area in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, income tax and any withholding tax because the allocation is made without monetary consideration and is not in connection with a sale. The partition is made merely to segregate the saleable area between the parties, as the return of the capital which each contributed. However, the acknowledgement on said Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. DA-097-2001 dated May 28, 2001) The transfer is also not subject to VAT since under Section 105 of the Tax Code of 1997, any 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 imposed in Sections 106 to 108 of the same Tax Code. Hence, by contributing the parcels of land, the Owner, neither sells, barters, exchanges goods, properties nor renders service to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001; BIR Ruling No. DA-115-2001 dated September 5, 2001) 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, this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service