Ayala Land Inc.

February 5, 2009 BIR RULING [DA-(JV-006) 060-09] Section 22 (B); BIR Ruling No. DA-011-03 Ayala Land Inc. Tower One & Exchange Plaza, Ayala Triangle Ayala Avenue Makati City Attention: Atty. Mildo Flor C. Sison Head of Tax Gentlemen : This refers to your letter dated October 22, 2008 requesting for confirmation of your opinion that 1) the joint development of the condominium Project, "Senta" by Ayala Land, Inc. ("ALI") and Alveo Land Corporation ("ALC," formerly Community Innovations, Inc. or "CII") will not create a taxable joint venture within the meaning of Section 22 (B) in relation to Section 27 (A) of the National Internal Revenue Code of 1997 (the "Tax Code"); and 2) the allocation of their respective interests in the Project and the execution of the Deed of Partition to implement such allocation are not taxable events, and are not subject to income, creditable/expanded withholding tax, value-added tax, and documentary stamp tax under Section 196 of the Tax Code. As represented, ALI is a corporation duly organized and existing under Philippine laws. It is the lawful and beneficial owner of a certain parcel of land located in Makati City, with an aggregate gross area of approximately one thousand eight hundred sixty-five square meters (1,865 sq.m.), and more particularly described in, and covered by, Transfer Certificate of Title No. 217847 of the Registry of Deeds for Makati City (the "Property"). EITcaD ALC, on the other hand, is a corporation duly organized and existing under Philippine laws and is engaged in the development of real estate. On March 13, 2008, ALI and ALC (collectively, the "Parties") entered into a Joint Development Agreement (the "Agreement") to jointly undertake the development of the Property into a condominium complex with residential, commercial and parking units. The summary of terms of the Agreement is as follows: (1) ALI 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. (2) ALC shall contribute the necessary project development and project management services for the construction and development of the condominium complex. (3) Prior to the sale of any residential or commercial condominium or parking unit to third parties, the Parties shall share in the distribution of the condominium units proportionate to their respective contributions. The Parties shall observe the principle that ALI, the landowner, shall be entitled to such number of units equal to 15.88% of the Gross Saleable Area for the Residential Units and 15.15% of the Gross Saleable Area for the Parking Units, and ALC, the developer, shall be entitled to such number of condominium units equal to 84.12% of the Gross Saleable Area for the Residential Units, 84.85% of the Gross Saleable Area for the Parking Units, and 100% of the Gross Saleable Area for the Commercial Units in the Project. Accordingly, Section 3.2 of the Agreement on the determination of the allocation of condominium units to each Party provides: Return of Contributions . In return for their respective contributions to the Project, the Co-Developers shall receive their respective Allocations as follows: (a) ALI shall receive an Allocation of (i) fifteen and 88/100 percent (15.88%) of the Gross Saleable Area for the Residential Units and (ii) fifteen and 15/100 percent (15.15%) of the Gross Saleable Area for the Parking Units. (b) CII shall receive an Allocation of (i) eighty-four and 12/100 percent (84.12%) of the Gross Saleable Area for the Residential Units, (ii) eighty-four and 85/100 percent (84.85%) of the Gross Saleable Area for the Parking Units, and (iii) one hundred percent (100%) of the Gross Saleable Area for the Commercial Units. EIDATc (c) For the purpose of distributing the respective Allocations of the Co-Developers for the Residential Units, each Co-Developer shall be entitled to be allocated to itself the highest number of Residential Units, which shall be equal to, but not exceed, its Allocation. For this purpose, CII shall classify the Residential Units into several categories on the basis of each Residential Unit's location, size and amenities, and shall rank each category from least prime to most prime. The selection process shall be implemented in the order starting from the highest category of Residential Units. Thus ALI shall have the right to draw four (4) Residential Units from all Residential Units in a particular category; thereafter, CII shall have the right to draw twenty-one (21) Residential Units from all Residential Units from the balance of Residential Units in the particular category. Thereafter, ALI shall again have the right to draw four (4) Residential Units from the then remaining Residential Units in the particular category, and CII shall again have the right to draw twenty-one (21) Residential Units from the then remaining Residential Units in the particular category. In the event that the Allocation applicable to a Co-Developer cannot be completely satisfied by the selection of whole Residential Units in a particular category, then the remaining Residential Units in such category shall be included as part of the Residential Units belonging to the next category of Residential Units to be subject to the same alternating cycle of selection specified in this Section 3.29 (c). The foregoing alternating cycle of selection shall be followed for each category of Residential Units until ALI shall have chosen such whole number of Residential Units that is equal to, or nearly equal, but not more than its Allocation. The balance of Residential Units remaining after ALI shall have completed its selection shall pertain to CII as part of its Allocation. The same process of distribution shall be undertaken with respect to Parking Units. The process of selection shall be undertaken with respect to Parking Units. The process of selection shall be commenced by the parties within thirty (30) days from the completion and approval of the Design Development Plan and shall be completed within one day. (4) The actual distribution to the Parties of the units 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 rata allocation described above. (5) After distribution of the respective allocations specified, the Parties shall respectively maintain separate ownership of such allocated units. Each Party may sell or transfer the units to third parties independently of the other, and without pooling their profits and resources with the other party. In reply, please be informed as follows: 1) Pursuant to Section 22 (B) of the Tax Code of 1997, the term "corporation" shall include 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. TESDcA Such being the case, the joint venture that will be formed as a result of the Joint Development Agreement by and between ALI and ALC for the development of the Property into a condominium complex with residential, commercial and parking units is not subject to the corporate income tax under Section 27 (A) of the Tax Code. 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. Considering the clear provision of Section 22 (B) which clearly manifests the intention of the legislature to exclude from the definition of taxable corporation joint venture/s formed for the purpose of undertaking construction projects, this Office hereby confirms your opinion that the joint venture of ALI and ALC is not a corporation subject to corporate income tax. However, for VAT purpose, the joint venture is by itself a taxable entity. 2) The allocation/distribution of their respective shares consisting of condominium and parking units in the Project in consideration of their contribution in the Project, as stipulated in the Agreement, and the issuance of the corresponding condominium Certificate of Title by the Registry of Deeds of Makati City to ALI and ALC representing their respective shares or participating interests in the Project as stipulated in the Agreement is not a taxable event. The same is therefore, not subject to the regular income tax under Section 27 (A) of the Tax Code, the creditable withholding tax under Revenue Regulations No. 2-98, as amended, the value-added tax under Section 106 of the Tax Code and the documentary stamp tax under Section 196 also of the Tax Code. Nonetheless, the acknowledgment to the Deed is subject to documentary stamp tax under Section 188 of the Tax Code. 3) Section 185 of the Revised Documentary Stamp Tax (DST) Regulations No. 26 provides that "conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable." Since the Deed of Partition is without consideration and not in connection with a sale made to ALI and ALC, respectively, no income was generated and a fortiori , no income, creditable withholding, value-added and documentary taxes are payable and collectible. However, the acknowledgment to said Deed of Partition is subject to DST of P15.00 pursuant to Section 188 of the Tax Code of 1997. 4) The Deed of Conveyance to be executed by ALI and ALC to convey the common areas of the Property and its registration in the name of the Condominium Corporation and pursuant to the Condominium Act will not be subject to income, withholding and value-added taxes and documentary stamp tax under Section 196 of the Tax Code considering that the conveyance is without monetary consideration. This authorizes the Revenue District Officer of the revenue district where the Property is located to issue the corresponding Tax Clearance Certificate/Certificate Authorizing Registration with regard to the transfer of the title to the Property in the name of the Condominium Corporation upon completion of the Project, without need of presentation of proof of payment of the creditable withholding and the value-added taxes and documentary stamp tax under Section 196 of the Tax Code. 5) It is only upon sale or disposition of the units allocated to ALI and ALC to third parties that the gain realized by the parties in the said transaction will be subject to the regular 35% (now 30%) income tax under Section 27 (A) of the Tax Code the creditable withholding tax under Revenue Regulations No. 2-98, as amended, and the value-added tax under Section 106 of the Tax Code. The transfer of the said properties to third parties shall likewise be subject to the documentary stamp tax imposed under Section 196 of the Tax Code based on the gross selling price or the fair market value of the property being transferred, whichever is higher. IHEaAc This will authorize the Revenue District Officer (RDO) of the revenue district where the properties are located to issue the corresponding Certificate Authorizing Registration (CAR) and Tax Clearance Certificate (TCL) involving the transfer of the titles to the parties based on their respective allocations pursuant to the Deed of Partition, without need of the presentation of proof of payment of the creditable withholding tax, value-added tax and the corresponding documentary stamp tax. Provided, that the parties to the joint venture shall cause the Register of Deeds to annotate on the Transfer Certificate/s of Title that a development project is being undertaken on the land and is the object of the Joint Venture Agreement between the parties, and that the joint venture is held to be a tax-exempt entity pursuant to this Ruling issued by this Office. Provided further, that the parties to the joint venture shall inform the Bureau of Internal Revenue, through the Law Division, of the fulfillment of the requirement on the distribution of the developed/saleable lots/units in accordance with the allocation ratio in the Joint Venture Agreement. For this purpose, a compliance report of the project indicating the number of lots/units developed/built, respective TCTs/CCTs and the party in whose name the corresponding title was issued. 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, and/or any of the requirements set forth in this letter are not complied with, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service