Grand Monaco Estate Developers, Inc.

May 2, 2007 BIR RULING [DA-283-07] 27 (A) DA-097-2001 Grand Monaco Estate Developers, Inc . No. 49, Sta. Ana St., near A. Tuazon Ave. San Roque, Marikina City Attention: Mr. Reynaldo A. Carpio President Gentlemen : This refers to your letter dated March 8, 2007 requesting for a ruling that (1) the joint development of a 2-Storey Townhouse with Attic Subdivision of Grand Monaco Estate Developers, Inc. (Monaco) and Spouses Nerio P. Laino and Rosa Maria R. Gavieres-Laino, landowners, 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 Spouses Nerio P. Laino and Rosa Maria R. Gavieres-Laino are the registered owners of the three (3) parcels of land at Brgy. San Joaquin, Pasig City with a total area of Three Thousand Two Hundred Seventy Four (3,274) square meters more particularly described under Transfer Certificates of Title No. PT-97517, 97519 and PT-9752; that Monaco and Spouses Laino entered into a Memorandum of Agreement for a joint development of said townhouse subdivision; and that the parties agreed, viz: "A. Undertakings and Responsibilities of the First Party (Monaco): 1. The FIRST PARTY shall be responsible for the preparation of designs and plans of the proposed 2-storey townhouse with attic subdivision 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 without delays all necessary approvals and permits from the concerned authorities. The FIRST PARTY further agrees and commits itself to build and construct the Townhouse 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. All the Townhouse units must be of good quality work, attractive and presentable as per mutually agreed plans and specifications, Both parties herein shall decide the price of Townhouse units upon final determination of plans and specification in order to ascertain fixed references for costing according to areas and finishes involved. All the Plans, specifications, Subdivision Plan to be mutually agreed upon shall form as integral parts of this Agreement; 2. The FIRST PARTY agrees to undertake at its expense, the relation 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 at its expense all materials, labor, equipment, tools and engineering expertise for the land development aspect of the project such as the road network, concrete hallow block walls, waterlines, drainage lines, electrical lines, entrance gate, landscaping and beautification of the project site The FIRST PARTY must, in all instances, regularly meet with the SECOND PARTY for the purpose of getting the latter's ideas, opinions and concurrence; 4. The FIRST PARTY, subject to the rights of the SECOND PARTY which are mentioned in this agreement and as provided for in the immediately preceding paragraph, has the sole and exclusive obligation to build and construct the townhouse subdivision and all the facilities mentioned herein at its expense and must be within the period specified herein. The FIRST PARTY is however given the option to construct the townhouses in mass or in cluster depending on the market situation but the said FIRST PARTY must finish the construction and development of the townhouse subdivision without delay and not later than the period stated hereunder. The FIRST PARTY assures that the construction of the Townhouse Units shall be treated against termites and warrant that the execution follows the safety Electrical Code, Structural Code, Plumbing Code and National Building Code; 5. That the FIRST PARTY guarantees the completion of the projects within Three (3) years upon release of construction permit by the building official. Said construction permit must, therefore, be secured without delay. It is understood that the FIRST PARTY, as the DEVELOPER, shall extend its best effort to fully develop the property within the specified time. In the event 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; 6. The FIRST PARTY expressly warrants that all the materials and other housing components that it will use for construction of the townhouses 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. All the foregoing shall constitute as express warranty and shall be understood to render the SECOND PARTY free and harmless from any or all claims, liability, damages or whatever cause of` action or legal action, any unit buyer or government agency may present or claim against the SECOND PARTY for a breach of the aforesaid warranty. In such event, FIRST PARTY agrees to assume, at its own expense, the defense for any or all legal actions. 7. The FIRST PARTY for the purpose of showing its utmost good faith and intention to abide by its obligation to construct and to finish the townhouses and land development project which is the subject matter of this Agreement hereby incorporates as part of this Agreement hereby incorporates as part of this Agreement the hereto attached Board Resolution showing that its principal stockholders has authorized its President, Reynaldo A. Carpio, Ph.D. for the same purpose of showing good faith has likewise signed this Agreement in his personal capacity to indicate and make manifest that he is jointly and severally liable with the FIRST PARTY in this Agreement. B. Undertakings and Responsibilities of the Second Party (Spouses Lanio): 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 except that which is the existing loan balance with the PREMIER BANK and which the First Party herein commits to take out this loan thru its own initiative or its Bank Facilities or assume obligation over the mortgage account within sixty (60) days upon the signing of this Agreement and should the Bank requires the Transfer of Title in the name of the First Party in order to facilitate the assumption of loan obligation from Premiere Bank, the Second Party is willing and agrees to cooperate with such undertakings and the rights and interest of the Second Party must first be protected by means of a side agreement or any other deeds or documents as may be offered by the Bank or to be mutually agreed by both of the parties. The Second Party commits to pay the aforesaid cash advances by means of share reduction of their assigned townhouse units, valued at cost without the mark up charges meaning direct cost only. The Second Party can however pay in cash instead of the Townhouse Unit subject to the cost of money charges of Two (2%) Percent per month; 2. That the First Party acknowledges that the Second Party has at present no sufficient funds as their property was not sold in cash. The First Party, is therefore, willing to extend a loan to the Second Party, aside from the cash advance mentioned in the Paragraph 1-A, in the amount of P500,000.00 to be given to the Second Party in the following manner: a) P200,000.00 upon signing this MOA; b) P30,000.00 monthly beginning May 25, 2007 and every month thereafter until the balance of P300,000.00 is fully given to the Second Party The Second Party, if they do not opt to pay in cash with 2% per month, agree that this loan will be considered as a reduction in their shares in the townhouse units in favor of the First Party; 3. That the Second Party shall keep up to date the payment of the 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 also be borne by the Second Party until and upon the assignment of lot shares to both parties; 4. That the Second Party shall undertake to execute the required deeds or such other deeds or documents to register the titles of the townhouses in their names; 5. 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 of the First Party; 6. 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; 7. That the Second Party acknowledges the First Party's rights to protect its investment and by annotating at the back of the Original Titles this Agreement which shall be duly registered with the Registry of Deeds of Pasig City; 8. 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 g\drainage line, water lines, power lines, as such, the Second Party guaranteed perpetuity of usage as this is the only egress, ingress available. The title covering the Road Right of Way Property bearing TCT No. PT 97522 with an area of Eight Hundred Eighty One square meters and Fifty square decimeters (881.50 sq. m.) and which is the basis of this warranty shall form an integral part of this Project which is hereto attached as Annex E of this 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 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. Such being the case, the Joint Venture of Monaco and Spouses Laino 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 Spouses Laino 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. The Partition Agreement whereby Monaco and Spouses Laino 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