BIR Ruling [DA-263-99]

May 5, 1999 BIR RULING [DA-263-99] Trion Homes Development Corporation 2nd Level, Robinsons Galleria Edsa Entrance, Edsa corner Ortigas Avenue Quezon City Attention: Arch . Prudencio C . Castillo Senior Vice President & General Manager Gentlemen : This refers to your letter dated July 9, 1998 requesting for a ruling on the tax implications of the Exclusive Development and Marketing Agreement entered into by and between Robinsons Land Corporation (RLC), as Owner and Trion Homes Development Corporation (THDC), as Developer for the development of several parcels of land located at Barangay Pasong Kawayan, General Trias, Cavite into a residential subdivision and/or other land uses. It is represented that RLC is the absolute and registered owner of three (3) parcels of land located in Barangay Pasong Kawayan, General Trias, Cavite with an aggregate area of 140,085.76 square meters and covered by TCT Nos. T-681239, T-681240 and T-681241 issued by the Register of Deeds of Cavite; that on February 6, 1998, RLC and THDC entered into an Exclusive Development and Marketing Agreement for the development of the above-mentioned properties into a residential subdivision known as Southsquare Village as well as the marketing and operation of the same; that THDC has agreed to undertake and to finance the full development, marketing, management and operation of the project; and that the essential features of the Agreement are as follows: 1) that the Owner and Developer shall share in the Project by dividing the saleable lots between themselves so that the Developer shall be entitled to sixty percent (60%) of the saleable lots and the Owner shall be entitled to forty percent (40%) thereof. The Developer and the Owner shall agree on the specific lots that will pertain to each; and 2) that the Developer shall have the right to build housing units on the share of saleable lots of the Owner. Proceeds of the housing units shall belong to the Developer while the proceeds from lot sales remains for the benefit of the Owner. Based on the foregoing representations, you now request confirmation on the following issues: "1. The Exclusive Development and Marketing Agreement entered into by and between RLC and THDC does not create a separate taxable entity; "2. The allocation and distribution of the saleable lots to RLC and THDC is not subject to income tax, expanded withholding tax, value-added tax and documentary tax; "3. The sale by RLC or THDC of their respective shares in the saleable lots to third parties is generally subject to income tax, expanded withholding tax (unless exempt under Republic Act No. 7279 on socialized housing and similar acts), documentary stamp tax and value-added (unless exempt under Section 109(w) of the Tax Reform Act); "4. The collection of sales proceeds and remittance of expanded withholding tax, value-added tax and documentary stamp tax may be in the name of RLC or THDC by virtue of the marketing provision of the Exclusive Development and Marketing Agreement. Accordingly, THDC may execute the Deed of Absolute Sale in its name as regards its share in the saleable lots notwithstanding the fact that the titles to the property are still in the name of RLC; and "5. RLC or THDC can secure the Tax Clearance/Certificate Authorizing Registration from the Regional District Office of their respective principal office/place of business with regard to the sale of developed units pertaining to their respective shares." 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 legislature 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 Exclusive Development and Marketing Agreement entered into by RLC and THDC 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 saleable lots to RLC and THDC in consideration of their respective contributions, as stipulated in the Exclusive Development and Marketing 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. Moreover, in the event that THDC as developer decides to transfer the title to the property representing its share in the saleable lots in its name, such transfer is still not subject to the aforementioned taxes. 3. However, upon subsequent sale by RLC or THDC of their respective shares in the saleable lots to third parties, the gain that may be realized by them from such sale will be subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997 and to the creditable withholding tax under Revenue Regulations No. 2-98 and to the value-added tax and documentary stamp tax imposed under Sections 106 and 196 both of the Tax Code of 1997. (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) 4. The Exclusive Development and Marketing Agreement provides that THDC being the developer shall have exclusive marketing rights over all saleable lots of the property including the 40% share of RLC and inasmuch as the term "marketing" includes but is not limited to the determination of marketing policies, pricing, terms and conditions of sale, restrictions to be annotated on the titles of lots, documentation and collection of proceeds of sales. Accordingly, by virtue of the marketing agreement, THDC may execute the Deed of Absolute Sale in its name in order to transfer title to the property in the name of the buyers with regard to its share in the saleable lots as well as the 40% share of RLC provided that it should be stated in the Deed of Absolute Sale that THDC is acting as Attorney-in-Fact for the 40% share of RLC notwithstanding the fact that in the latter case, titles to the properties may still be in the name of RLC. Such being the case, the creditable withholding tax, documentary stamp tax and value-added tax paid thereon may be credited in the name of RLC. 5. 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 sale of developed units pertaining to their respective shares upon presentation of the evidence 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, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue