SGV & Co.

December 28, 2007 BIR RULING [DA-702-07] Joint Venture, Sec. 22 DA-058-07; DA-325-07 SGV & Co. 6760 Ayala Avenue Makati City Attention: Mr. Joel L. Tan-Torres Partner, Tax Services Gentlemen : This refers to your letter dated December 14, 2007 requesting for a ruling on the tax consequences of the Project Development Agreement between Rockwell Land Corporation ("RLC") and Manila Electric Company ("MERALCO") for the construction of a mid-rise business process outsourcing ("BPO") office complex (the "Project"), to wit: SECATH 1. The Project Development Agreement will not create a separate taxable joint venture within the meaning of Section 22 (B), in relation to Section 27 (A) of the National Internal Revenue Code of 1997 (hereinafter, the "Tax Code"); EaCSTc 2. Since the Project Development Agreement will not create a separate taxable joint venture, the subsequent division and allocation of ownership over floor areas pursuant to Allocation Agreements between the parties is not be subject to income tax. Documents submitted disclosed that MERALCO is the owner of a certain parcel of land with an approximate aggregate area of One hectare and Three Thousand square meters situated in the Meralco-Ortigas complex along Ortigas Avenue, Pasig City. RLC is a corporation engaged in the real estate business and is duly licensed to undertake real estate development and management. RLC and MERALCO will enter into a Project Development Agreement (the, "Agreement") for the construction, on the land owned by MERALCO, of a mid-rise business process outsourcing ("BPO") office complex with retail spaces situated on the ground floor consistent with the redevelopment plan of converting the Meralco-Ortigas complex into a mixed-use development (the "Project"). THCASc Under the proposed Agreement, RLC and MERALCO will finance, develop, implement, and complete the Project based on a Master Development Plan through an unincorporated joint venture. MERALCO has agreed to contribute the use of its land and P3,000,000.00 in cash, which in the aggregate will be equivalent to thirty percent (30%) of the "Project Contribution" as said term will be defined in the Agreement on the other hand, RLC agreed to shoulder all construction costs of the Project and to contribute P7,000,000.00, which in the aggregate shall be equivalent to seventy percent (70%) of the "Project Contribution". RLC and MERALCO further agreed that within a reasonable time as will be subsequently agreed by the parties, from the completion of each phase of the Project, the Parties shall divide and allocate ownership over the floor areas for such phase of the Project in proportion to their 70%-30% agreed contributions under the proposed Agreement to be executed between the parties. In reply, please be informed that your opinion is hereby confirmed as follows: IDcHCS Pursuant to Section 22 (B) of the Tax Code of 1997, as amended, the term corporation includes 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. 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 Project Development Agreement entered into by RLC and MERALCO will not create a separate taxable joint venture within the meaning of Section 22 (B) of the Tax Code of 1997, as amended, and the resulting joint venture between said parties is not subject to the corporate income tax under Section 27 (A) of the same Code. However, RLC and MERALCO are separately subject to the regular corporate income tax on their taxable income during each taxable year respectively derived by them from the Project. ADHaTC The subsequent division and allocation of ownership over floor areas pursuant to Allocation Agreements between the parties 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 party to the joint venture has contributed. However, upon subsequent sale by RLC and MERALCO of their respective shares in the saleable floor areas to third parties, any gain that may be realized by them from such sale will be subject to the regular corporate income tax under Section 27 (A) of the Tax Code of 1997, as amended, and consequently, to the creditable withholding tax under Revenue Regulations No. 2-98, as amended. Likewise, said sale is subject 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 Section 106 thereof, as amended by Republic Act No. 9337, and as implemented by Revenue Regulations No. 16-2005, as amended. HTDAac In connection with the above construction undertaking, 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. Moreover, this ruling authorizes the Revenue District Officer of the revenue district where the property is located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the transfer of the floor areas to be received by RLC and MERALCO based on their respective allocations based on their agreement 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. cACHSE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service