BIR Ruling [DA-265-99]

May 5, 1999 BIR RULING [DA-265-99] 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 Robinsons Homes, Inc. (RHI), as Developer for the development of a parcel of land located at Horseshoe Drive, Quezon City into a residential. townhouse subdivision. It is represented that RLC is the absolute and registered owner of a parcel of land located at Horseshoe Drive, Quezon City with an aggregate area of 5,444 square meters and covered by TCT No. 118614 issued by the Registry of Deeds for Quezon City; that on February 9, 1998, an Exclusive Development and Marketing Agreement was entered, into by and between RLC and RHI for the development and marketing of the above-mentioned parcel of land known as Centennial Place; that RLC contributed the above-mentioned property while RHI agreed to develop the same into a residential townhouse subdivision on an upscale category, including the marketing and operation of the same; that expenses for the development works and construction of housing units are for the account of RHI; that RHI shall exclusively undertake the marketing of the saleable units including those pertaining to RLC; and that the essential features of the Agreement are as follows: 1) the Owner and Developer shall share in the Project by dividing the saleable units between themselves so that the Developer shall be entitled to sixty (60%) percent of the saleable units and the Owner shall be entitled to forty (40%) percent thereof. The Developer and the Owner hereby agree on the specific lots that will pertain to each; and 2) the Developer shall exclusively undertake the marketing of the forty percent (40%) share of the Owner in the saleable units of the Property. . . . 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 RHI does not create a separate taxable entity; "2. The allocation and distribution of the developed saleable lots to RLC and RHI is not subject to income tax, expanded withholding tax, value-added tax and documentary tax; "3. The sale by RLC 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 RLC 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 RLC; and "5. RLC 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." 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 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 RHI 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 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 RLC 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 exclusively undertake the marketing of its share in the property as well as those pertaining to the 40% share of RLC and considering further that the term "marketing" includes beat 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 by virtue of the marketing agreement, RHI 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 in the latter case, it should be stated in the Deed of Absolute Sale that RLC is merely acting as Attorney-in-Fact of RLC. Accordingly, 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 property is 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