Ayala Land, Inc.

December 28, 2007 BIR RULING [DA-693-07] Ayala Land, Inc. Mondragon House 324 Sen. Gil Puyat Avenue Makati City Attention: Atty. Mena R. Ojeda, Jr. Legal Counsel Gentlemen : This refers to your letter dated November 7, 2007 stating that Ayala Land, Inc. (ALI) is a corporation duly organized and existing under Philippine laws and is the registered owner of certain parcels of land located in Barangay Salawag, Municipality of Dasmarias, Province of Cavite covered by TCT Nos. T-380378 and T-380493; that on the other hand, Avida Land Corporation is a corporation duly organized and existing under Philippine laws and is engaged in the development of real estate; that on December 27, 2002, ALI and Laguna Properties Holdings, Inc. (now Avida Land Corporation) entered into a Joint Development Agreement for the joint development of the Parcels into a subdivision project which the Parties have agreed to call "Villa Sta. Cecilia" (the Project); that the Project consists of the planning and development of the Parcels 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, the Allocation of Saleable Lots between the Parties in proportion to their respective contributions, and the marketing and sale of the Saleable Lots and Saleable Housing Units pursuant to the terms and conditions specified herein; that the Project also includes the marketing, sale, design and construction of housing units that may be constructed on the Saleable Lots at the option of the buyers; that the specific terms of the Agreement are as follows: (a) ALI shall contribute the Parcels (and all its rights, title and interest in and to the same) that will constitute the entire area of the Project. (b) Avida Land Corporation shall contribute the necessary expertise for the construction and development of the Project, the actual development costs, 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 Corporation and ALI shall share in the distribution of the Saleable Lots and Saleable Housing Units in each phase (the Phase) constituting part of the Project proportionate to their respective contributions. Thus: ALI shall receive, as its allocation for each phase, such number of Saleable Lots located therein with an aggregate Reference Value amounting to 42% of the total Reference Value of all Saleable Lots in such phase, computed in the following manner: RVALI = (42% x R) Where: RVALI = the Reference Value of ALI allocation with respect to the relevant value R = the total Reference Value of All Saleable Lots in the relevant Phase Avida Land Corporation shall receive as its allocation for each phase such number of Saleable Lots located therein with an aggregate Reference Value equal to the difference between the Total Reference Value of all Saleable Lots in the Phase and the aggregate Reference Value of ALI's allocation therein. CcTIAH ALI shall receive, as its allocation for each phase, such number of Saleable Housing Units located therein with an aggregate Reference Value amounting to 21% of the total Reference Value of all Saleable Housing Units in such phase, computed in the following manner: RVALI = (21% x R) Where: RVALI = the Reference Value of ALI allocation with respect to the relevant value R = the total Reference Value of all Saleable Housing Units in the relevant Phase Avida Land Corporation shall receive as its allocation for each phase such number of Saleable Housing Units located therein with an aggregate Reference Value equal to the difference between the Total Reference Value of all Saleable Housing Units in the Phase and the aggregate Reference Value of ALI's allocation therein. All road lots, easements, utilities, facilities and open space in the Project shall be ceded to and registered in the name of Avida Land Corporation. (d) The actual distribution to ALI and Avida Land Corporation of the Saleable Lots and Housing Units as their respective Allocation 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 pro rata allocation above. (e) After distribution of their respective Allocation, ALI and Avida Land Corporation shall respectively maintain separate ownership of such allocated Saleable Lots and Housing Units 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 ALI 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 Lots and Saleable Housing Units 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; 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; IcCEDA 4. In accordance with the provisions of Presidential Decree No. 957, and the rules and regulations implementing the same, the conveyance by ALI 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 Lots and Saleable Housing Units, 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. SAHaTc In reply thereto, please be informed that your opinion is hereby confirmed 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. 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 ALI and Avida Land Corporation 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 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 respective shares of the Parties in the Project consisting of Saleable Lots and Saleable Housing Units 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. 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. HIaTCc 4. The conveyance by ALI 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 Lots and Saleable Housing Units, the gain that may be realized by them from such sale will be subject to the regular corporate income tax under Section 27 (A) 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) 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. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service