Creativ Property Group, Inc.

November 6, 2009 BIR RULING [DA-(JV-028) 654-09] 274-92; 010-96; DA065-97; DA286-98 Creativ Property Group, Inc. 36 Mascardo Street, La Paz Village Makati City Attention: Ms. Cynthia M. Garma President Gentlemen : This refers to your letter dated August 23, 2009 stating that Spouses Edrolin B. Garma and Cynthia M. Garma (Spouses Garma) are the owners of two (2) parcels of land located at 7644 Guijo Street, San Antonio Village, Makati City covered by TCT Nos. 224402 and 22404 issued by the Registry of Deeds for Makati City; that on the other hand, Creativ Property Group, Inc. (CPGI), as the Developer, is a corporation organized and existing under the laws of the Philippines; that Spouses Garma wish to cause the development of the above-mentioned property into a residential-office-commercial condominium (the Project); that the Developer having the facilities and technical know-how in the development work has agreed to under the development of the above-mentioned property by constructing a 5-storey residential-office-commercial condominium; that on August 20, 2009, a Memorandum of Agreement (MOA) was entered into by Spouses Garma and the Developer; and that Spouses Garma shall be entitled to 30% of the saleable condominium units while the Developer shall be entitled to the remaining 70% thereof. Based on the foregoing representations, you now request confirmation of your opinion that 1. The MOA entered into by and between CPGI and Spouses Garma does not create a separate taxable entity; 2. The allocation and distribution of the saleable units to CPGI and Spouses Garma is not subject to income tax, expanded withholding tax (EWT), value-added tax (VAT) or gross receipts tax (GRT) and documentary stamp tax (DST); 3. The sale by CPGI or Spouses Garma of their respective shares in the saleable units to third parties is generally subject to income tax, EWT (unless exempt under RA 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/Certificate Authorizing Registration (TCL/CAR) with regard to the sale of all saleable units of the Project. AcSIDE 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 Spouses Garma and CPGI 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 income tax 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 respective shares of the Parties in the Project consisting of saleable units 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. 3. However, upon subsequent sale by the Parties of their respective shares consisting of saleable units, the gain that may be realized by them from such sale will be subject to the regular individual income tax or corporate income tax under Sections 24 (A) or 27 (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 properties are located to issue the corresponding Certificate Authorizing Registration (CAR) or Tax Clearance Certificate (TCL) involving the transfer of the titles to the parties based on their respective allocations pursuant to the MOA, 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 MOA 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 BIR, through the Law Division, of the fulfillment of the requirement on the distribution of the developed/saleable units in accordance with the allocated ratio in the MOA. Provided finally, that each of the co-venturers shall report their income on the sale of the allocated developed units. For this purpose, a compliance report of the project indicating the number of 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, then this ruling shall be considered null and void. HCTaAS Very truly yours, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal & Inspection Group