Homemark, Inc.

November 9, 2007 BIR RULING [DA-581-07] Sec. 22 DA 431-2007 Homemark, Inc. Unit C, San Antonio Bldg. 1595 Quezon Avenue, Quezon City Attention: Filbert C. Famatiga VP-Homemark, Inc. Gentlemen : This refers to your letter dated November 06, 2007 stating that HOMEMARK INC., (HOMEMARK for brevity) is a corporation duly organized and existing under the laws of the Republic of the Philippines and is engaged in the business of acquiring, developing and selling real estate, including residential subdivision. KALIKASAN HOMES CORPORATION (KALIKASAN for brevity), on the other hand, is the absolute and registered owner of four (4) parcels of land situated in Imus Estate Subdivision and covered by Transfer Certificate of Title Nos. T-1206740, T-1206743, T-1206750 and T-1206748. On October 31, 2007, HOMEMARK as developer, entered into a Joint Venture Agreement with KALIKASAN for the development of the above-mentioned real estate into a residential subdivision. The salient portions of the said agreement are as follows: TDCaSE "1. That upon signing of the said agreement, KALIKASAN, hereby allows HOMEMARK to take actual possession and occupancy of the said parcel of lands for the purpose of undertaking land development/earth moving activities, relocation surveys, preparing the site development plan and engineering details, house constructions and all aspects of full subdivision or housing projects; 2. That HOMEMARK shall secure and pay for all the necessary licenses plus cost of the required bond, permits, approval from the Local Government, HLURB, DENR, DAR, MERALCO, Register of Deeds and all other agencies having authority on residential subdivisions; 3. That HOMEMARK shall shoulder all expenses for the materials, equipment, labor and services in the development of said lands; 4. That upon signing the said agreement, KALIKASAN shall immediately deliver to HOMEMARK the owner's duplicate copies of the titles to the property; TSIDEa 5. That for and in consideration of the development obligations and undertakings it will assume, HOMEMARK, will receive sixty (60%) percent of the saleable subdivisions lots, the remaining forty (40%) percent shall be retained in ownership by KALIKASAN." In connection therewith, you would like to request for confirmation of the following opinion: 1. That the Joint Venture Agreement between HOMEMARK and KALIKASAN for the development of the real properties mentioned in the agreement into a residential subdivision will not give rise to a taxable joint venture as provided under Section 22 (B), in relation to Section 27 (A), both of the Tax Code of 1997, as amended; CITDES 2. That the allocation of saleable lots between HOMEMARK and KALIKASAN in consideration of their respective contributions, as stipulated in the Agreement, is not a taxable event and is not subject to income tax, and subsequently withholding tax, and the Value-Added Tax (VAT), since the allocation of the saleable lots is in fact a mere return of capital that each contributed; 3. That any partition whereby HOMEMARK and KALIKASAN allocated unto each other their share in the saleable lots in consideration of their respective contribution, is not subject to Documentary Stamp tax (DST) imposed under Section 196 of the Tax Code of 1997, as amended, nor to any income tax, and consequently withholding tax, since the allocation is made without monetary consideration and is not in connection with sale. In reply, please be informed as follows: ACTEHI Section 22 (B) of the Tax Code of 1997 provides that 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 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; (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. HcACST 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, the JVA entered into by and between the Landowner and the Developer is not subject to the corporate income tax under Section 27 (A) of the Tax Code of 1997, as amended, and is not required to file quarterly and final or adjustment/income tax returns. However, the co-venturers are separately subject to the regular income/corporate income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. (BIR Ruling No. DA-194-06 dated March 28, 2006) DHaECI The allocation of their respective shares in the Project in consideration for their respective contributions to the said JVA 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. The marketing agreement to be executed by the parties whereby the saleable lots that will be allocated to the Landowner in the joint venture project shall be titled in the name of the Developer, as the marketing arm thereof, being without monetary consideration is not subject to income tax, withholding tax, value-added tax and documentary stamp tax. (BIR Ruling Nos. 207-92 dated July 16, 1992; 349-93 dated July 30, 1993; DA Ruling No. 025-95 dated January 11, 1995) However, upon the subsequent disposition of all the saleable lots, the gain that may be realized by the co-venturers from such sale will be subject to the creditable withholding tax under Revenue Regulations No. 2-98, as amended by Revenue Regulations Nos. 6-2000 and 12-2000. In addition thereto, such sale shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, based on the gross selling price or fair market value of the properties, whichever is higher. Furthermore, the said sale shall likewise be subject to VAT. (BIR Ruling No. DA-013-05 dated January 19, 2005) HAIaEc In connection with the above development agreement, the Joint Venture and the co-venturers are hereby required to register with the revenue district office (RDO) where their principal place of business is located. The party to the joint venture who undertakes the development of the project shall file an annual information return and other returns required to be filed with the RDO where it is registered. Moreover, this ruling authorizes the Revenue District Officer of the revenue district where the properties are located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the transfer of the titles to the lots to be received by the above-named Landowner and Developer based on their respective allocations pursuant to the partition without need of presentation of proof of payment of the capital gains tax or the creditable withholding tax, documentary stamp tax and value-added tax and/or donor's 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. EcaDCI Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service