An Ordinance Amending Section 12, Chapter 3, Title 2 of City Ordinance No. 484, S-2011 as Amended by Ordinance No. 553, S-2014, Otherwise known as the Mandaluyong Revenue Code, by Providing Therein an Additional Section on Ad Valorem Tax on Idle Lands

August 13, 2008 BIR RULING [DA-(JV-018) 137-08] Sec. 22; Joint Venture NBS Law Office 3/F, P & L Building, 116 Legazpi Street Legazpi Village, Makati City Attention: Atty. Elvin Hayes E. Nidea Gentlemen : This refers to your letter dated August 5, 2008 requesting for and in behalf of your client, Globe Asiatique Realty Holdings Corporation ("Globe Asiatique"), confirmation of your opinion that: cHaDIA 1) The terms of the Development Agreement ("DA") executed by and between Globe Asiatique and Mr. Jose Feliciano, in his own capacity, and in representation of Gloria Tiglao-Perret, Feliciana G. Tiglao, Encarnacion G. Tiglao, Pacita Tiglao-Feliciano, Jose M. Gueco, Marcelo G. Tiglao and Jesus G. Tiglao (the "Landowners"), do not give rise to a separate taxable joint venture pursuant to Section 22 (B) of the Tax Code, as amended; and 2) The allocation and distribution of saleable lots to Globe Asiatique and the Landowners in the project pursuant to the DA, and the execution of the partition agreement pursuant to the DA to implement such allocations, are not taxable events and therefore are not subject to income tax, creditable withholding tax (CWT), value-added tax (VAT), and documentary stamp tax (DST). aDHCEA The facts as represented are as follows: On July 25, 2008, Globe Asiatique, the Developer, and the Landowners entered into a development agreement whereby they agreed to form an unincorporated joint venture for the purpose of developing the real properties owned by the latter, located in Tabun, Mabalacat, Pampanga, and covered by Transfer Certificate of Title (TCT) Nos. 158391-R, 158392-R, 243432-R, 243433-R and 243434-R, having a total area of 897,986 square meters (collectively referred to as "Properties"). The capital contributions of the parties are as follows: a) Globe Asiatique will provide financing, planning, designing, marketing, construction, development, management and general operation of all the facets of the Project; and HSaIDc b) The Landowners will contribute their above-mentioned parcels of land to the Project. After the development of the Project and in return for their investments, the parties will receive the following: Globe Asiatique 70% on all saleable lots in the Project Landowners 30% on all saleable lots in the Project In support of your request, you submitted copies of the Transfer Certificates of Title (TCTs), Tax Declarations (TDs), Unnotarized (proposed) Development Agreement and Unnotarized (proposed) Partition Agreement. HIEAcC In reply, please be informed as follows: Section 22 (B) of the Tax Code of 1997, as amended, states as follows: "Section 22. Definitions. When used in this Title: xxx xxx xxx (B) 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. 'General professional partnerships' are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business." (Emphasis supplied) TacESD The abovementioned exemption was initiated under Presidential Decree (P.D.) No. 929, dated May 4, 1976, which amended the definition of a "taxable" corporation in the Tax Code, as amended, to specifically exclude joint ventures formed for the purpose of undertaking construction projects. Said P.D. instituted the amendment of the definition of the term "taxable" corporation in recognition of the following situations: (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 local contractors to enter into joint ventures to pool their limited resources in undertaking big construction projects. Hence, to assist the local contractors in achieving competitiveness with foreign contractors, the joint ventures formed by said local contractors were thus deemed as not falling under the definition of a "taxable" corporation, and thus not subject to income tax. This was, and still is, the intention of the legislature. Such being the case, the Development Agreement entered into by Globe Asiatique with the landowners, namely: Mr. Jose Feliciano, Gloria Tiglao-Perret, Feliciana G. Tiglao, Encarnacion G. Tiglao, Pacita Tiglao-Feliciano, Jose M. Gueco, Marcelo G. Tiglao and Jesus G. Tiglao, is not subject to the income tax imposed under Section 27 (A) of the Tax Code of 1997, as amended. EHTIcD Moreover, the allocation of the saleable lots between Globe Asiatique and the landowners, which is done effectively in consideration of their respective contributions, does not constitute a taxable event, as no income is actually realized by either the developer and/or the landowners. The partition or allocation will be made without consideration, and will not be in connection with any sale between the said parties. As has been ruled by the BIR on numerous occasions, income, in a broad sense, means all wealth which flows into the taxpayer other than as a mere return of capital (Section 36, RR No. 2). The developer and the landowners, having contributed to the development of the aforementioned real properties, will not realize any income upon the allocation of the saleable lots. Hence, the allocation of lots arising from the Development Agreement executed by the above parties is not subject to capital gains tax, income tax, and consequently, to withholding tax. The said allocation, likewise, is not subject to VAT. Under Section 105 of the 1997 Tax Code, as amended, any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services and any person who imports goods shall be subject to VAT. However, by contributing the parcels of land, the landowners neither sells, barters, exchanges goods, property nor renders services to be subject to VAT. (BIR Ruling No. DA-240-2001 dated November 16, 2001; BIR Ruling No. DA-115-2001 dated September 5, 2001). The developer and the landowners will only realize income upon their respective sales of the saleable lots allocated to each of them. In this regard, said sales to third parties, if ever undertaken by the developer and/or the landowners, would be subject to regular income tax at the rate of 35%, in accordance with Sections 24 (A) and 27 (A) of the 1997 Tax Code, as amended, and consequently to withholding tax as implemented under Revenue Regulations (RR) No. 2-98, as amended. The said sales by the developer and/or the landowners to third parties would likewise be subject to the VAT at the rate of 12%, in accordance with Sections 106 and 109 of the 1997 Tax Code, as amended, and to the Documentary Stamp Tax (DST) at the rate fifteen pesos (P15.00) for each one thousand pesos (P1,000.00), or fractional part thereof in excess of one thousand pesos (P1,000.00) of such consideration or value, in accordance with Section 196 of the 1997 Tax Code, as amended. SEAHID Further, the Partition Agreement that will be executed by the developer with the landowners, whereby the developer and the landowners allocate unto each other their corresponding shares in the saleable lots in consideration of their respective contributions, are not subject to the DST imposed under Section 196 of the 1997 Tax Code, as amended, considering that, as stated earlier, the allocation is made without monetary consideration and is not in connection with a sale. In this regard, Section 185 of the Revised Documentary Stamp Tax Regulations (Regulations No. 26)provides that "conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable". Accordingly, since the aforementioned Partition Agreement will be executed without consideration and not in connection with a sale between Globe Asiatique and the landowners, no DST therefore is due and collectible on said Partition Agreement. However, the notarial acknowledgment to said Partition Agreement shall be subject to the DST pursuant to Section 188 of the 1997 Tax Code, as amended, in the amount of P15.00. In connection with the above development project, the Joint Venture created 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 properties are located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the transfer of the titles to the lots to be received by the developer and the landowners based on their respective allocations pursuant to the partition 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. EHaDIC 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service