Ayala Land, Inc.

June 11, 2008 BIR RULING [DA-356-08] 22 (B); DA-192-2001 Ayala Land, Inc. Tower One, Ayala Triangle Ayala Avenue, Makati City Attention: Atty. Mildo F.C. Sison Head of Tax Gentlemen : This refers to your letter dated April 18, 2008 requesting confirmation of your opinion that: (1) the joint redevelopment by Ayala Land, Inc. (ALI) of Montecito Estates (the "Project"), located in Barangay Canlubang, Calamba City, Laguna with Montecito Properties, Inc. (MPI), will not create a taxable joint venture within the meaning of Section 22 (B) in relation to Section 27 (A) of the Tax Code of 1997, as amended; and (2) the allocation of their respective interests in the Project and the execution of the deeds of partition to implement such allocation are not taxable events and are not subject to income tax, creditable/expanded withholding tax, value-added tax and documentary stamp tax under Section 196 of the 1997 Tax Code. cSHATC It appears that MPI is the lawful and beneficial owner of certain parcels of land located in Barangay Canlubang, Calamba City, Laguna, with an aggregate area of approximately six hundred thousand square meters (600,000 sq.m.), more or less, and more particularly described in, and covered by transfer certificates of title (TCTs) of the Registry of Deeds for the Province of Laguna. The Property is a residential subdivision known as the Montecito Estates, but not including the parcels of land already sold to third parties. On the other hand, ALI is a corporation duly organized and existing under Philippine laws and is engaged in the development of real estate. On March 28, 2008, MPI and ALI (collectively, the "Parties") entered into a Joint Redevelopment Agreement (the "Agreement") to jointly undertake the redevelopment of the Property. The Agreement consists of the planning, construction and redevelopment of the Property, its subdivision into Developed Lots and Common Areas for the benefit of the residents and occupants, including the adoption of a new master plan as well as the land redevelopment and design of all phases of the Project pursuant to the terms and conditions specified in said Agreement. DHcEAa For the purpose of undertaking the redevelopment of the Property, ALI shall undertake or cause to be undertaken, the design and planning of the intended redevelopment of the Property, including the subdivision thereof into several parcels of land to constitute a Phase and/or a subdivision lot, the planning, redesign and construction and/or rehabilitation of the Property's internal road network, common areas, open space, infrastructure and facilities for common use based on the requirements of the Project, the planning, design and specifications of each Phase including any components thereof, and the allocation of the Developed Lots to the Parties in return for their respective contributions. The summary of terms of the Agreement is as follows: (a) MPI shall contribute the Property (and all its rights, title and interest in, and to the Property) that will constitute the entire area of the Project. (b) ALI shall contribute its brand equity and its expertise as well as the construction and the redevelopment of the Property in accordance with the project specifications, as well as complete, at its own cost, the facilities of the Property such as the: (i) entrance gate, (ii) chapel, (iii) village clubhouse, (iv) additional roads, if needed, (v) landscaping, (vi) signage facilities and speed humps, (vii) repair of the perimeter fence, (viii) street lighting fixtures, (ix) a sewage treatment plant, (x) reconditioning of water facilities, and (xi) deep-wells, pumps and generator sets. (c) After the redevelopment but prior to the sale of any Developed Lot to third parties, the Parties shall share in the distribution of the Developed Lots in each Phase constituting part of the Project proportionate to their respective contributions. Accordingly, Section 3.1 of the Agreement on the determination of the Allocation of Developed Lots to each Party provides: Return of Contributions . In return for their respective contributions to the Project, the parties shall receive their respective Allocations as follows: DHEaTS (a) MPI shall receive an Allocation fifty-five percent (55%) of all Salable Lots of the Project. (b) On the other hand, ALI shall receive: (i) forty-five percent (45%) of all Salable Lots of the Project; and (ii) all road lots, bridges, easements, utilities, facilities, deep wells and open spaces in the [Property], subject to the constitution of easements thereon pursuant to Section 3.4. (d) The actual distribution to the Parties of the Developed Lots as their respective allocations shall be effected through the execution of deeds of partition, which the Parties shall execute without monetary consideration. Prior to the execution of any deed of partition, the Parties' prorated interest in the Project shall be the basis of the pro rata allocation described above. (e) After distribution of the respective allocations specified, the Parties shall respectively maintain separate ownership of such allocated Developed Lots. Each Party may sell or transfer the Developed Lots to third parties independently of the other, and without pooling their profits and resources with the other party. EcDSHT In reply, please be informed as follows: 1. Pursuant to Section 22 (B) of the Tax Code of 1997, the term "corporation" 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. P.D. No. 929 amended the definition of the taxable corporation so 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; and (4) To assist them in achieving competitiveness with foreign contractors, the joint ventures formed by them should not be considered as additional income tax lien. Considering therefore, 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 hereby opines that the joint venture by and between MPI and ALI is not subject to income tax under Section 27 of the Tax Code of 1997, as amended. 2. The allocation between MPI and ALI of their corresponding shares of the Developed Lots in the Project is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax, because the allocation is a mere return of capital contribution, and therefore not a taxable event. (BIR Ruling No. DA-192-2001 dated October 17, 2001) 3. The Deed of Partition that will be executed by MPI and ALI whereby they will allocate unto each other their shares, in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, because the allocation is made without monetary consideration and is not in connection with a sale. The allocation is made merely to segregate the Developed Lots between the parties, as the return of the capital which each has contributed. However, the acknowledgement to said Deed of Partition is subject to the documentary stamp tax pursuant to Section 188 of the same Tax Code, as amended. (BIR Ruling No. DA-240-2001 dated November 16, 2001) SAHEIc 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, as amended. Hence, by contributing its parcels of land, MPI, neither sells, barters, exchanges goods, properties nor renders services 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) It is understood however, that 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 creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001 or capital gains tax under Section 27 (D) (5), as the case may be. Moreover, such sale shall be subject to the documentary stamp tax imposed under Section 196 of the 1997 Tax Code, as amended, based on the gross selling price or fair market value of the property, whichever is higher. Furthermore, the said sale shall likewise be subject to VAT. This will authorize the Revenue District Officer (RDO) of the revenue district where the properties are located to issue the corresponding Certificate Authorizing Registration (CAR) and Tax Clearance Certificate (TCL) involving the transfer of the titles to the parties based on their respective allocations pursuant to the Deed of Partition, without need of the presentation of proof of payment of the creditable withholding tax, value-added tax and the corresponding documentary stamp tax. Provided, that the parties to the joint venture shall cause the Register of Deeds to annotate on the TCT that a development project is being undertaken on the land and is the object of the Joint Venture Agreement between the parties, and that the joint venture is held to be a tax-exempt entity pursuant to this Ruling issued by this Office. Provided further, that parties to the joint venture shall inform the Bureau of Internal Revenue, through the Law Division, of the fulfillment of the requirement on the distribution of the developed/saleable lots/units in accordance with the allocation ration in the Joint Venture Agreement. For this purpose, a compliance report of the project indicating the number of lots/units developed/built, respective TCTs/CCTs and the party in whose name the corresponding title was issued. TIDaCE This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. ATSIED Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service