Earth Centrum Realty & Development Corporation

October 6, 2008 BIR RULING [DA-(JV-033) 277-08] Earth Centrum Realty & Development Corporation Unit 7, 2nd Floor Francisco Gold Condominium 784 EDSA, Kamias Quezon City Attention: Ms. Louella S. Ferrer External Affairs Officer Gentlemen : This refers to your letter dated April 24, 2008 stating that Marlin Realty Corporation (Marlin) is a corporation duly organized and existing under the laws of the Philippines with principal office at 618 La Salle Street, Greenhills, Mandaluyong City; that on the other hand, Earth Centrum Realty & Development Corporation (Earth) is likewise a domestic corporation duly organized and existing under the laws of the Philippines; that Marlin is the absolute and registered owner of a parcel of land located at Barrio San Isidro, Angono, Rizal, covered by TCT No. 620581 issued by the Registry of Deeds for Rizal and containing an aggregate area of 15,104 square meters; that Marlin is desirous of having the said parcel of land developed into a residential subdivision; that Earth, as Developer, has the necessary financial and technical capabilities to undertake the development of the said parcel of land into a residential subdivision; that on February 9, 1995, a Development Agreement was entered into by Marlin, as the Landowner, and Earth, as the Developer; that the salient features of the said Development Agreement are as follows: CTacSE 1) The Developer shall prepare the subdivision plans, engineering designs and other plan in accordance with the Standard Rules and Regulations as prescribed by the Housing and Land Use Regulatory Board (HLURB), and/or any government agencies which regulate the development and construction of residential subdivision. 2) Upon the signing of this Agreement, the Owner shall allow the Developer to take actual possession of the property subject of this Agreement and shall immediately undertake preparation of all documents, plans, surveys and layouts of the property, and may proceed with the development upon approval of the subdivision plan by the proper government agency. 3) The Owner agrees and binds itself to compensate the Developer in the form of residential lots, equivalent to 60% net saleable area (meaning net of all areas required for roads, parks, playgrounds and open space). The Owner shall retain the remaining 40% of the saleable area. The lots shall be selected alternately, based on the approved final subdivision plan. 4) Upon approval and release of the subdivision plan by the Bureau of Lands, as well as the proper approving government agency, the Owner hereby agree to execute the Deed of Assignment in favor of the Developer for the titles of the residential lots in the subdivision assigned to it as well as the roads, parks, playgrounds and open space, free and clear of all liens and encumbrances. However, as a form of guaranty for the completion of all the development works in the subdivision by the Developer, it is agreed that the Owner shall release to the Developer the certificates of title corresponding to its share of the lots based on the following schedule: TCEaDI DEVELOPMENT WORK % OF COMPLETION a. Surveying and engineering works: 10% Preparation of the development plan including approval of the same by approving government agency. b. Earthmoving works. Clearing and 15% grubbing; and cut and fill. c. Road construction works: Roadway 25% excavation; sub-base preparation and base preparation. d. Concrete works: Road pavement; curbs 20% and gutters; sidewalks; and street posts and names. e. Water, power and drainage works: Water 20% distribution pipes; underground drainage pipes; and external power distribution works. f. Completion works. 10% Based on the foregoing representations, you now request for a ruling that the transfer or assignment by Marlin of 58 lots (inclusive of lots intended for roads and open spaces), TCT Nos. 642201 to 642205, 642207, 642208, 642210, 642211, 642213, 642215, 642217, 642224 to 642237, 642239, 642240, 642242, 642244, 642246, 642248, 642249, 642257 to 642262, 642264, 642268, 642270, 642273 to 642275, 642277, 642279, 642281 to 642283, 642285 to 642288 & 642290 to 642293 or 11,060 square meters representing more than 60% of the total project with Marlin are exempt from the expanded/creditable withholding tax under Revenue Regulations No. 2-98, as amended and the corresponding documentary stamp tax under Section 196 of the Tax Code of 1997. EcHAaS 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 Development Agreement entered into by Marlin, as Landowner and the Earth, as 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 Development 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. 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. HcDSaT 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. HIaSDc Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service