BIR Ruling [DA-226-05]

May 19, 2005 BIR RULING [DA-226-05] 22 (B); 27 (A); DA-097-2001 Ayala Land Inc. Tower One, Ayala Triangle Ayala Avenue, Makati City Attention: Atty. Maria Angeli L. Ferrer Division Manager Legal Department Gentlemen : This refers to your letter dated April 20, 2005 requesting for a confirmation of your opinion that the: 1. joint development and construction of a high-end integrated seaside leisure development between Subic Bay Development and Industrial Estate Corporation and Ayala Land, Inc. 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. allocation of their respective interests in the project and the execution of the Deed of Partition to implement such allocation is not a taxable event and is not subject to income/expanded withholding tax, value-added tax, and documentary stamp tax under Section 196 of the Tax Code. It is represented that the Subic Bay Development and Industrial Estate Corporation (SUDECO) is a corporation duly organized and existing under Philippine laws; that it is the legal and registered owner of or have interests in, certain parcels of land with an aggregate area of approximately 3,713,217 square meters located in the Municipality of Morong, Province of Bataan, more specifically described in Transfer Certificates of Title Nos. T-165721 and T-205502-205530; that Ayala Land, Inc. (ALI) is a corporation duly organized and existing under the Philippine laws and is engaged in the development of real estate; that on November 4, 2003, SUDECO and ALI (Parties) entered into a Joint Development Agreement for the joint development of the parcels into a high-end integrated seaside leisure development consisting in farm lot developments, commercial lot developments, membership clubs, residential development consisting of single detached house and lots, duplex developments, townhouses and condominiums, condotels, and vacation membership facilities (project); that more specifically, the Project will entail the masterplanning of the intended development of the Parcels, the planning and subdivision thereof into several parcels of land to constitute a Phase thereof, 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 marketing and sale to the public of the products resulting from the development; that these products may be in the form of lots, house and lot units, townhouse units, condominium units, shares or such other types of end products (Developed Units); that the salient terms of the Agreement are summarized below as follows: 1. In consideration of the receipt by SUDECO of Developed Units as a return on its contribution, SUDECO shall contribute all of its rights, title and interest in and to the Parcels and all agreements for access and rights-of-way to and from the Project. To effect the contribution of the Parcels or any agreed portion thereof to the Project, SUDECO shall deliver and transfer vacant physical possession of each Phase of the Property as of the intended commencement date of planning and development of said Phase; 2. In consideration of the receipt by ALI of Developed Units as a return on its contribution, ALI shall (a) provide the necessary financing to construct and develop the Project, and (b) provide the necessary expertise and be responsible for the over-all development of the Project; 3. In return of their respective contributions top the Project, SUDECO and ALI shall partition their respective interests in the Project and receive their respective allocations proportionate to such interests. In determining their respective allocations in the Developed Units, each of the Parties was credited with an agreed value for their contribution known as the "Reference Value" (defined as the Peso value to be assigned to a Developed Unit equal to the gross selling price if purchased by a buyer on a deferred payment basis). The allocation of ALI and SUDECO for each type of development shall be as follows: a. For phases developed as residential subdivision. developments, SUDECO shall receive an allocation in Developed Units with an aggregate Reference Value of approximately 30% of the total Reference Value of all the Developed Units in the particular phase in the Project, and ALI shall be allocated and receive the balance of approximately 70% of the Total Reference Values of all Developed Units in each such phase of the Project; b. For phases developed as a beach club resort, for which a beach club corporation shall be organized, SUDECO shall receive an allocation in Developed Units having a total Reference Value of approximately 8% of the total Reference Value of all the Developed Units and ALI shall be allocated and receive the balance of approximately 92% of the Total Reference Values of all Developed Units in each such phase of the Project; c. For phases developed as farm lot developments, SUDECO shall receive an allocation in Developed Units with an aggregate Reference Value of approximately 30% of the Total Reference Value of all the Developed Units in the particular phase in the Project and ALI shall be allocated and receive the balance of approximately 70% of the total Reference Values of all Developed Units in each such phase of the Project; d. For phases developed as commercial developments, SUDECO shall receive an allocation in Developed Units with an aggregate Reference Value of approximately 30% of the total Reference Value of all the Developed Units in the particular phase in the Project and ALI shall be allocated and receive the balance of 70% of the total Reference Values of all Developed Units in each such phase of the Project; e. The percentage allocation for components of the Project other than those stated in subparagraphs (a) to (d) above representing the Parties' respective returns on their contributions in the form of Developed Units shall be mutually agreed upon by the Parties prior to the commencement of the development of such component of the Project; f. All road lots, easements, utilities, facilities and open space in the Project shall be ceded to and shall be registered in the name of ALI, subject to the condition that ALI shall grant a perpetual right of way easement through such roads for the benefit of the Project which right of way; easement and recognition of open space and other easements shall be annotated on the transfer certificates of title covering the Parcels or a Phase thereof. ALI shall have the right to cause the transfer or donation of road lots, easements, utilities, facilities and open space in the Project in accordance with the requirements of applicable law. 4. SUDECO and ALI shall select the Developed Units to represent their respective allocations. The actual distribution to SUDECO and ALI of the Developed Units 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 Phase of the Project. 5. After distribution of the Developed Units, SUDECO and ALI shall maintain separate ownership of their allocated Developed Units and may sell, lease, or transfer their respective Developed Units to third parties. and that the Agreement was rendered effective on January 31, 2005 by virtue of an Agreement to Render Effective the Joint Development Agreement. 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 Subic Bay Development and Industrial Estate Corporation and Ayala Land, Inc. is not subject to the corporate income tax under Sections 27 of the Tax Code of 1997. Consequently, gross payments received by said joint venture is 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 SUDECO and ALI 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. ScCEIA The Partition Agreement whereby SUDECO and ALI 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) 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group