BIR Ruling [DA-264-99]

May 5, 1999 BIR RULING [DA-264-99] Robinsons Homes, Inc. 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 H.R. Lopez Co., Inc. (H.R. Lopez), as Developer for the development of several parcels of land located at Buhangin, Davao City into a residential subdivision and/or other land uses. It is represented that H.R. Lopez is the absolute and registered owner of six hundred twenty three (623) parcels of land located in Buhangin, Davao City with an aggregate area of 365,944 square meters inclusive of the saleable lots of not less than two hundred sixty four thousand three hundred fifty (264,350) square meters (Property); that the above-mentioned property consists of the Phase II and III of the Panorama Homes Subdivision in Davao City, comprising the unsold saleable lots therein, road lots, open spaces and easements; that H.R. Lopez desires to develop the Property into a mixed-use residential and commercial subdivision project; that on June 21, 1996, H.R. Lopez and RLC entered into an Exclusive Development and Marketing Agreement for the development of the above-mentioned properties into a mixed-use residential and commercial subdivision as well as the marketing, management and operations thereof, that on March 31, 1998, a Deed of Assignment was executed by and between RLC and Robinsons Homes Incorporated (RHI), whereby the former has agreed to assign the development of the project to the latter; that RHI is granted the exclusive option to construct housing units on the saleable lots of the property including the lots pertaining to H.R. Lopez as its share; that ownership and proceeds from the sale of the housing units shall accrue solely to RHI regardless of whether the lots on which the houses are built shall pertain to H.R. Lopez or to RHI; that the marketing of the saleable lots shall be exclusively undertaken by RHI which includes the determination of marketing policies, pricing, terms, documentation, collection of proceeds, etc.; 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 subdivision lots between themselves so that the Developer shall be entitled to forty-five percent (45%) of the saleable lots in the saleable lots in the altered site development plan, as prepared by the Developer and approved by the proper government agency, and the Developer shall be entitled to fifty-five percent (55%) of the said saleable lots but in no less than the One Hundred Forty Five Thousand Four Hundred square meters or Fourteen and 54/100 (14.54) Hectares, as provided under Section 13 of Article 1. The Owner and Developer shall, before any selling is done, agree on the specific lots that will pertain to each in accordance with this paragraph. Allocation of developed land shall be done in phases; 2) subject to the provision of Section 9 of Article 1, development of the open space for Phase I of the Panorama Subdivision shall be the sole responsibility of the Owner. If a portion of the Property will be allocated for the open space corresponding to Phase I of the Panorama Subdivision as necessitated by the Developer's site development plan, the space shall be for the account of the Owner. Further, Developer may restrict the open spaces for Phases II and III of the Panorama Subdivision for the benefit only of the lot buyers in the said phases; and 3) the Developer shall own exclusively the housing units constructed on the saleable lots and shall be entitled to all the proceeds thereof, regardless of whether the lots on which the houses are built pertain to the Owner or to the Developer. 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 H.R. Lopez and RLC (now assigned to RHI) does not create a separate taxable entity; "2. The allocation and distribution of the saleable lots to H.R. Lopez and RHI is not subject to income tax, expanded withholding tax, value-added tax and documentary tax; "3. The sale by H.R. Lopez or RHI 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 H.R. Lopez or RHI by virtue of the marketing provision of the Exclusive Development and Marketing Agreement (EDMA). Accordingly, RHI 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 H.R. Lopez; and "5. H.R. Lopez or RHI 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." LLphil 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 H.R. Lopez 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 H.R. Lopez and RHI 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 RHI 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 H.R. Lopez or RHI 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. Considering that the Exclusive Development and Marketing Agreement provides that RHI being the developer shall have exclusive marketing rights over all saleable lots of the project and considering further that 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, this Office is of the opinion as it hereby holds that RHI may execute the Deed of Absolute Sale under an irrevocable Special Power of Attorney in its name in order to transfer title to the property in the name of the buyers notwithstanding the fact that the titles to the properties may still be in the name of H.R. Lopez. Accordingly, the creditable withholding tax, documentary stamp tax and value-added tax paid thereon may be credited in the name of H.R. Lopez. 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. LexLib Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue