Avida Land Corporation

October 18, 2007 BIR RULING [DA-544-07] 22 (B) Avida Land Corporation Mondragon House 324 Sen. Gil Puyat Avenue Makati City Attention: Atty. Mena R. Ojeda, Jr. Legal Counsel Gentlemen : This refers to your letter dated July 2, 2007 stating that the Ty Partners is composed of Leticia T. Dee, Welison D. Ty, Wellington D. Ty, William D. Ty, Leonila D. Ty, Salustina T. Tan, all Filipinos and of legal age, and JJACCIS Development Corporation, Wam Food & Development Corporation, Alta Beta Investment and Trading Corporation, all corporations duly organized and existing under and by virtue of the laws of the Philippines with a common address at c/o Wellington Flour Mills, Shaw Boulevard, Bo. Pineda, Pasig City; that they are the lawful and beneficial co-owners of certain parcels of land located in Barangay Molino, Municipalities of Bacoor, Dasmarias and Imus, Cavite with an aggregate area of 609,018 square meters covered by TCT Nos. T-322602, T-339686, T-807134, T-739161, T-807140 of the Register of Deeds for the Province of Cavite (Property); that on the hand, Avida Land Corporation is a corporation duly organized and existing under the laws of the Philippines and is engaged in the development of real estate; that sometime in November 2005, Avida Land Corp purchased from the other members of the Ty Family said members' 48.9261% undivided interest on the Property, equivalent to an area of 609,018 square meters under certain terms and conditions, thereby MAKING Avida Land Corp co-owner of the Property to such extent; that thereafter, on December 14, 2005, the remaining members of the Ty Family (Ty Partners) who did not sell their undivided interest on the Property and Avida Land Corp (collectively, the Parties) entered into a Joint Development Agreement (Agreement), to jointly undertake the development of the Property into a residential subdivision consisting of house and lot units and corresponding open spaces to be sold in Phases; that for the purposes of undertaking the development of the Project, Avida land Corporation shall undertake or cause to be undertaken, the design and planning of the intended development of the Property, the subdivision thereof into several parcels of land to constitute a Phase and/or a subdivision lot as a component of Saleable Housing Unit, the design and construction of the internal road network, open space, infrastructure and facilities of the development, the planning, design and specifications of each Phase including any components thereof, and the marketing and sale to the public of the respective Saleable Housing Units to be received by the Parties as their respective Allocation; that the Project consists of the planning and development of the Property into a residential subdivision which shall be subdivided into Saleable Lots, Saleable Housing Units, and Common Areas for the benefit of the residents and occupants, and shall include the master planning of the intended project, land development and design of all phases of the Project, and the marketing and sale of the Saleable Lots and Saleable Housing Units pursuant to the terms and conditions specified therein; that the Project also includes the marketing, sale, design and construction of housing units (Housing Units) which may be constructed on the Saleable Lots at the option of the buyers; that the summary of terms of the Agreement are as follows: IDSaAH (a) The Ty Partners shall contribute the Property (and all its rights, title and interest in and to the same) that will constitute the entire area of the Project; (b) Avida Land Corp shall contribute the necessary expertise for the construction and development of the Project and perform all the development work for the Project; (c) After the development of the Project but prior to the sale or transfer of any portion thereof to third parties, Avida Land Corp and the Ty Partners shall share in the distribution of the Saleable Housing Units comprising the Project proportionate to their respective contributions. In determining each of the parties' respective shares in the Project, each Saleable Housing Unit shall be offered for sale to the public (the Reference Value). Each of the parties shall thereafter be allocated their respective shares as follows: (i) Landowners' Allocation It is agreed that in consideration for the contribution by the Parties of their respective undivided interests in and to the Property, the Parties shall collectively be entitled to an Allocation with an aggregate reference value equal to approximately 20% of the total reference value of all Saleable Housing Units in a Phase (Landowners' Allocation), to be distributed between the Parties as follows: (1) TY Partners' Landowners' Allocation the TY Partners shall receive an Allocation in the form of whole Saleable Housing Units per Phase with an aggregate reference value equal to approximately 51.0739% of the total land allocation. (2) LPHI's (now Avida Land Corporation) Landowner's Allocation-Avida shall receive an Allocation in the form of whole Saleable Housing Units in such Phase with an aggregate reference value equal to approximately 48.9261% of the Landowner's Allocation. cSDIHT (ii) Developer's Allocation In addition to the Allocation to which Avida is entitled to under Section 3.2 (a) (i) (2), Avida as developer of the Project shall be entitled to receive an Allocation in the form of whole Saleable Housing Units in such Phase with an aggregate reference value equal to approximately 80% of the total reference value of all Saleable Housing Units in the Project. (d) The actual distribution to the Parties of the Saleable Housing Units and Saleable Lots as their respective allocations shall be effected through the execution of a Deed of Partition which the Parties shall execute without monetary consideration. Prior to the execution of the Deed of Partition, the Parties shall have a prorated interest in the Project on the basis of the pro rate allocation above. (e) After distribution of the respective allocations specified, the Parties shall respectively maintain separate ownership of such allocated Saleable Housing Units and Saleable Lots and may sell or transfer the same to third parties independently of the other, and without pooling their profits and resources with the other party. In connection therewith, you now request confirmation of your opinion that 1. The joint venture whereby the TY Partners will contribute the Parcel and Avida, Land Corporation will contribute the expertise for the development of the Project into a residential subdivision project does not give rise to taxable joint venture, hence, is not subject to corporate income tax pursuant to Section 22 (B) in relation to Section 27 (A) of the Tax Code; 2. The allocation and distribution of the respective shares of the Parties in the Project consisting of Saleable Housing Units and Saleable Lots in consideration for their respective contributions to the joint venture is not a taxable event, hence, is not subject to the regular corporate income tax under Section 27 (A) of the Tax Code, nor creditable withholding tax under Revenue Regulations No. 2-98, and the documentary stamp tax under Section 196 of the Tax Code, because allocation is a mere return of capital that each of the Parties has contributed to the Project; THEDCA 3. The Deed of Partition to be executed by the parties whereby they allocate and distribute between them their respective shares in the Project in exchange for their respective contributions is without monetary consideration, hence, is not subject to value-added tax under Section 106 of the Tax Code, income/creditable withholding tax under Revenue Regulations No. 2-98, and the documentary stamp tax under Section 196 of the Tax Code; 4. In accordance with the provisions of Presidential Decree No. 957, and the rules and regulations implementing the same, the conveyance by Avida Land Corporation and registration of the Parcel in the name of the Homeowner's Association upon completion of the Project is not a taxable event and not subject to corporate income tax, VAT or documentary stamp tax. Consequently, the confirmation of this request will authorize the Revenue District Officer of the revenue district where the Parcel is located to issue the corresponding tax Clearance Certificate with regard to the transfer of the title to the Property in the name of the Homeowner's Association upon completion of the Project, without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax and value-added tax; 5. In the event, however, that any of the Parties shall subsequently sell their respective shares consisting of Saleable Housing Units and Saleable Lots, such sale shall be subject to the regular corporate income tax under Section 27 (A) of the Tax Code and the creditable withholding tax under Revenue Regulations No. 2-98, value-added tax imposed under Section 106, and documentary stamp tax imposed under Section 196, both of the Tax Code. In reply thereto, please be informed that your opinion is hereby confirmed as follows: SIcCEA 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 holds that the Agreement entered into by the TY Partners and Avida Land Corporation is not subject to the corporate income tax under Section 27 (A) or individual income tax under Section 24 (A) both of the Tax Code of 1997. However, the co-venturers are separately subject to the regular corporate income tax or individual 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 respective shares of the Parties in the Project consisting of Saleable Housing Units and Saleable Lots in consideration of their respective contributions, as stipulated in the 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. SHCaDA 3. The Deed of Partition to be executed by the Parties whereby they allocate and distribute between them their respective shares in the Project in exchange for their respective contributions is without monetary consideration is not subject to value-added tax under Section 106 of the Tax Code of 1997, as amended by Republic Act No. 9337, as implemented by Revenue Regulations No. 16-2005, income tax/creditable withholding tax under Revenue Regulations No. 2-98, as amended, and to the corresponding documentary stamp tax prescribed in Section 196 of the Tax Code of 1997, as amended. 4. The conveyance by Avida Land Corporation and registration of the Property in the name of the Homeowner's Association upon completion of the Project is not a taxable event and not subject to corporate income tax, value-added tax and documentary stamp tax. Accordingly, this will authorize the Revenue District Officer of the revenue district office where the Property is located to issue the corresponding Certificate Authorizing Registration (CAR) or Tax Clearance Certificate (TCL) with regard to the transfer of the title to the Property in the name of the Homeowner's Association upon completion of the Project, without need of presentation of proof of payment of the creditable withholding tax, documentary stamp tax and value-added tax. 5. However, upon subsequent sale by the Parties of their respective shares consisting of Saleable Housing Units and Saleable Lots, the gain that may be realized by them from such sale will be subject to the regular corporate income tax under Section 27 (A) or individual income tax under Section 24 (A) of the Tax Code of 1997 and to the creditable withholding tax under Revenue Regulations No. 2-98, as amended, and to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, and to the value-added tax imposed under R.A. No. 9337, as implemented by Revenue Regulations No. 16-2005, unless exempt under Section 109 (w), supra . (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) DaTICc 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service