Mr. Joseph C. Wang

December 12, 2007 BIR RULING [DA-637-07] Mr. Joseph C. Wang 11th Floor, PSBank Tower Sen. Gil Puyat Avenue Makati City S i r : This refers to your letter dated November 7, 2007 stating that Miriam Bernardo-Arguelles, Noemi Bernardo-Cabuay and Ophra Bernardo-Subion, represented herein by their father, Bayani L. Bernardo, are the absolute and registered owners of a parcel of land located at Molino Bacoor, Cavite and covered by TCT No. T-1000477 issued by the Registry of Deeds for the Province of Cavite with an aggregate area of 13,125 square meters; that on the other hand, Masaito Development Corporation (MDC) is a corporation duly organized and existing under the laws of the Philippines with principal office address at the 11th Floor, PSBank Tower, Sen. Gil Puyat Avenue, Makati City; that MDC is engaged in the business and has the financial, technical and manpower resources to undertake residential subdivision projects; that MDC offered to the above-mentioned landowners to develop the aforesaid parcel of land into a residential subdivision with all the appurtenant amenities and facilities; that the landowners are fully convinced of the capacity and capability of MDC to develop the said parcel of land into a residential subdivision and have agreed that MDC shall undertake the subdivision, development, marketing and management thereof; that on July 10, 2002, a Joint Venture Agreement (JVA) was executed by the landowners and MDC for the development of the above-mentioned parcel of land into a residential subdivision; that the salient features of the JVA are as follows: DHcESI 1. The parties agree that the relationship between them is not that of a partnership but that of a joint venture. They specifically agree, therefore, that for and in consideration of the expenses and services for distribution and development works that will be performed by the MDC on the Project, the landowners shall compensate the MDC in the form of resulting subdivision lots equivalent to fifty percent (50%) of the net saleable area after deducting the allocation for the roads and alleys, open spaces, community facilities, creek lots and easements of any and all kinds; 2. The landowners hereby grant the MDC to have the exclusive authority, with the power to appoint sub-agents to market and sell the subdivision lots in the Project, of the Landowners' lot shares as determined in this agreement. Both parties agreed that the selling price of the landowners' shares shall be P4,000/square meter inclusive of 5% broker's fee and all expenses to be incurred for the transfer of titles and tax declarations into buyer's name. Any amount in excess of P4,000/square meter will be retained by the MDC to cover any and all expenses it may incur in the selling of these properties and the collection therefrom; 3. For purposes of the sale of subdivision lots, the landowners shall deliver to MDC a special power of attorney specifically authorizing the latter to enter into contracts to sell and contracts of sale, subject to such terms and conditions which the landowners may fix. AEHTIC Based on the foregoing representations, you now request confirmation of your opinion that 1. The JVA entered into by and between the landowners and the MDC, as Developer, does not create a separate taxable entity; 2. The allocation and distribution of the saleable lots to the landowners and the MDC is not subject to income tax/expanded withholding tax, value-added tax (VAT) or gross receipts tax (GRT) and documentary stamp tax (DST); 3. The sale by the landowners or the Company 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), DST and VAT (unless exempt under Section 109 (w) of the Tax Code of 1997); and 4. The Revenue District Office (RDO) having jurisdiction over the property is authorized to issue the Tax Clearance/Certificate Authorizing Registration (CAR) with regard to the sale of all saleable lots within the Project. aSTHDc In reply thereto, please be informed that your opinion is hereby confirm 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. HaTISE 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 is of the opinion as it hereby holds that the JVA entered into by landowners and the Company 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 individual or 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 the landowners and the Company in consideration of their respective contributions, as stipulated in the 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. Moreover, in the event that the Company, as developer, decides to transfer the title to the property representing its share in the saleable lots under its name, such transfer is still not subject to the aforementioned taxes. 3. However, upon subsequent sale by the landowners or the Company 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) 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 ) 4. 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 saleable lots as prescribed in Revenue Regulations No. 24-2002. IATSHE Finally, the joint venture or the party 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 or required to be registered. 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. CAcEaS Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service