Angara Abello Concepcion Regala & Cruz

August 29, 2008 BIR RULING [DA-(JV-024) 180-08] Angara Abello Concepcion Regala & Cruz ACCRA Building 122 Gamboa Street, Legaspi Village Makati City Attention: Atty. Ruby Rose J. Yusi and Atty. Alson Benedict C. Velasco Gentlemen : This refers to your letter dated May 7, 2008 stating that your client, GMA Farms, Inc. (the Landowner), is the registered owner of the following parcels of land located in Barangay Natipuan, Nasugbu, Batangas, with an approximate area of 61,934 square meters and covered by TCT Nos. T-102939, T-102941, T-72193, T-72193 * and T-72194 issued by the Registry of Deeds for Batangas; that on the other hand, Fuego Land Corporation (the Developer) is an entity which will finance and develop the Properties into a subdivision project called "Phase 3A of the Terrazas de Punta Fuego Project (the Project); that on November 24, 2005, the Landowner and the Developer entered into a Memorandum of Agreement (MOA) whereby they agreed to form an unincorporated joint venture for the purpose of developing the said properties; that the capital contributions of the parties to the joint venture are as follows: ESHcTD (a) The Developer will provide the following contributions, among others: 1. Business planning; 2. Architectural, engineering and other design costs; 3. Land (horizontal) development costs; 4. Cost of constructing standard first class community facilities and amenities; 5. Costs of locational clearances, development permits, licenses and other fees related to the execution of development works; (b) The Landowner will contribute the Properties for purposes of the Project. that after the development of the Project and in return for their investments in the joint venture, the parties will receive the following: (a) For Regular Lots classified in the Business Plan: 1. The Developer shall be entitled to sixty percent (60%) of the Regular Lots in the Project; and 2. The Landowner shall be entitled to forty percent (40%) of the Regular Lots in the Project. (b) For Premium Lots classified in the Business Plan: 1. The Developer shall be entitled to fifty five percent (55%) of the Premium Lots in the Project; and 2. The Landowner shall be entitled to forty five percent (45%) of the Premium Lots in the Project. and that on April 18, 2008, the parties executed a Supplemental Agreement (SA), among others, allocating and identifying the lots of the Project going to each party. Based on the foregoing representations, you now request for confirmation of your opinion that 1. The terms of the MOA dated November 24, 2005 and the SA dated April 16, 2008 between the Landowner and the Developer do not give rise to a separate taxable joint venture pursuant to Section 22 (B) of the Tax Code of 1997; and DEcSaI 2. The allocation and distribution of subdivision lots to the Landowner and the Developer in the project pursuant to the MOA and the SA are not taxable events, and therefore, are not subject to income/creditable withholding tax, value-added tax (VAT) and documentary stamp tax (DST). 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 MOA entered into by the Landowner and the Developer 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 in consideration of their respective contributions, as stipulated in the MOA 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, the Deed of Partition to be executed by the Parties whereby they allocate and distribute between them their respective shares in the Project in the form of saleable lots is without monetary consideration is not subject to the corresponding documentary stamp tax prescribed in Section 196 of the Tax Code of 1997, as amended. It is understood however, that upon subsequent disposition by the co-venturers of the areas allocated to them, the gain that may be realized by them from such sale will be subject to the creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001 or capital gains tax under Section 24 (D) (1), as the case may be. Moreover, 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. This will authorize the Revenue District Officer (RDO) of the revenue district where the property is located to issue the corresponding Certificate Authorizing Registration (CAR) and Tax Clearance Certificate (TCL) involving the transfer of the title to the parties based on their respective allocations pursuant to the Deed of Partition, without need of 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 TCTs that a development project is being undertaken on the land and is the object of the development 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 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 in accordance with the allocation ratio in the development agreement. For this purpose, a compliance report of the project indicating the number of lots developed, the respective TCTs and the party in whose name the corresponding title was issued. (BIR Ruling No. DA-373-2008 dated June 19, 2008) 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. DSTCIa Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service