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October 19, 2010

BIR RULING NO. 108-10

Sec. 22 (B); DA(JV-020)537-2009 dtd.


9/14/09

Avida Land Corp.


8/F Mondragon Building
324 Sen. Gil Puyat Avenue
Makati City

Attention: Atty. Arlene Montero


Legal Counsel

Gentlemen :

This refers to your letter dated July 01, 2010, requesting con rmation on the tax
implications of the joint venture for construction purposes between Aurora Properties,
Inc. ("Aurora") and Avida Land Corp. ("Avida") for the joint development of a parcel of
land located in Barangay Canlubang, Calamba City, Laguna, into a residential
subdivision.
Background
Aurora is a corporation duly organized and existing under Philippine laws with
principal place of business at the 31/F Tower One Exchange Plaza, Ayala Triangle, Ayala
Avenue, Makati City, and duly authorized to engage in real estate business as provided
in the Primary Purpose of its Amended Articles of Incorporation, as follows:
"PRIMARY PURPOSE
To acquire, hold and dispose of by purchase, lease, exchange, mortgage,
donation or in any other manner, conditionally and absolutely, and to use,
improve, develop, sub-divide, manage and hold for investment or otherwise, real
estate or any interest therein of any kind, whether improved or unimproved, and
to erect or cause to be erected on any real estate buildings or other similar
structures, together with their appurtenances."
On the other hand, Avida is also a corporation duly organized and existing under
Philippine laws with principal place of o ce at the 8/F Mondragon Building, 324 Sen.
Gil Puyat Avenue, Makati City. The primary purpose of Avida as duly authorized in its
amended Articles of Incorporation is as follows: SCETHa

"PRIMARY PURPOSE
To acquire by purchase, lease, donation or otherwise, and to own, use,
improve, develop, subdivide, sell, mortgage, exchange, lease, develop and hold
for investment or otherwise, real estate buildings, houses, apartments, and other
structures of whatever kind, together with their appurtenances; to carry on and
conduct a general contracting business with any party, including the
constructing, repairing, remodeling, operation, maintenance, nancing of, or
otherwise to engage in, any work upon any and every kind and description of
public works, buildings, structures, earth construction and installations; to enter
into and execute contracts or to make or receive assignments of contracts
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therefore or relating thereto; and to manufacture and/or furnish construction
and building materials, equipment and supplied connected therewith."
Aurora is the registered owner of a parcel of land (the "Property") with an area of
approximately Two Hundred Fifty-Nine Thousand One Hundred Fifty-Eight (259,158)
square meters located in Barangay Canlubang, Calamba City (the "Property") more or
particularly described in and covered by Transfer Certi cate of Title No. T-681854 of
the Registry of Deeds for Calamba City.
On January 13, 2010, Aurora and Avida entered into a Joint Development
Agreement (the "JDA") for the formation of a joint venture for construction purposes
whereby Aurora, as registered owner of the Property, shall contribute the Property to
the joint venture, and Avida, shall contribute project development services to construct
and develop the Property into a residential subdivision (the "Project") with shared
amenities, utilities and facilities to be developed on the Property.
In return for their respective contribution each party shall receive their respective
allocation of Saleable House and Lot Units/Saleable Lot Units from the Project. Aurora
shall receive an allocation of eleven percent (11%) of the saleable House and Lot Units
and twenty- ve percent (25%) of the Saleable Lots of the Project. Avida shall receive an
allocation of eighty-nine percent (89%) of the Saleable House and Lot Units and
seventy-five percent (75%) of the Saleable Lots of the Project.
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) TCacIA

The abovementioned exemption was initiated under Presidential Decree (PD) No.
929, dated May 4, 1976, which amended the de nition of a "taxable" corporation in the
Tax Code, as amended, to speci cally exclude joint ventures formed for the purpose of
undertaking construction projects. Said PD instituted the amendment of the de nition
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 nancial 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 de nition of a "taxable" corporation, and thus not subject to
income tax. This was, and still is, the intention of the legislature.

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Such being the case, the Development Agreement entered into by and between
Aurora and Avida is not subject to the income tax under Section 27 (A) of the Tax Code
of 1997, as amended.
Moreover, the allocation of the saleable units between Aurora and Avida, which is
done effectively in consideration of their respective contributions, does not constitute a
taxable event, as no income is actually realized by either Aurora and/or Avida. The
Partition Agreement or Deed of Allocation will be executed 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). Aurora
and Avida, having contributed to the development of the aforementioned real
properties, will not realize any income upon the allocation of the saleable units. Hence,
the allocation of units arising from the Partition Agreement is not subject to 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, Aurora and Avida 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). IHAcCS

Aurora and/or Avida will only realize income upon their respective sales of the
saleable units allocated to each of them. In this regard, said sales to third parties, if
ever undertaken by Aurora and/or Avida, would be subject to regular (corporate)
income tax at the rate of 30%, in accordance with Section 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 Aurora and/or Avida 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 fteen 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.
Further, the Partition Agreement or Deed of Allocation whereby Aurora and Avida
will allocate unto each other their share in the saleable units in consideration of their
respective contributions, is 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 Aurora and/or Avida, no DST therefore is due and collectible on said
Partition Agreement or Deed of Allocation. However, the notarial acknowledgment to
said Partition Agreement or Deed of Allocation shall be subject to the DST pursuant to
Section 188 of the 1997 Tax Code, as amended, in the amount of P15.00.
On the other hand, since under the Joint Venture Agreement Avida undertakes to
market the saleable lots allocated to Aurora, by virtue of an exclusive marketing
agreement, the marketing fees derived by Avida thereof shall be subject to income tax
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imposed under Section 27 (A) of the Tax Code of 1997, as amended, and consequently,
to the withholding tax imposed under Revenue Regulations No. 2-98, as amended, and
to the VAT imposed under Section 108 of the same Tax Code. The sale by Avida of the
lots allocated to Aurora to third parties by virtue of the Marketing Agreement, shall be
subject to income tax and consequently, to the creditable withholding tax (CWT) and to
VAT. The CWT attributable thereto shall be credited against the income tax liability of
Aurora. Moreover, said sale is subject to the DST imposed under Section 196 of the
same Tax Code at the rate above-mentioned. (BIR Ruling Nos. 660-2007 dated
December 18, 2007; 621-07 dated December 7, 2007; and 620-07 dated December 7,
2007)
This will authorize the Revenue District O cer (RDO) of the revenue district
where the property is located to issue the corresponding Certi cate Authorizing
Registration (CAR) and Tax Clearance Certi cate (TCL) involving the transfer of the
titles to the parties based on their respective allocations pursuant to the Deed of
Partition/Partition Agreement, without need of the presentation of proof of payment of
the CWT, VAT and the corresponding DST. Provided, that the parties to the joint venture
shall cause the Register of Deeds to annotate on the TCT 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 O ce. Provided further, that parties to the joint venture shall
inform the Bureau of Internal Revenue, through the Law Division, of the ful llment of the
requirement on the full distribution of the nished/saleable units in accordance with the
allocation ratio in the Joint Venture Agreement/Project Agreement. For this purpose, a
compliance report of the project indicating the number of units developed/ nished,
respective CCTs and the party in whose name the corresponding title was issued. SEIcHa

Finally, since under the Joint Venture Agreement/Project Agreement the


developer undertakes to market the nished/saleable units allocated to the landowner
by virtue of an exclusive marketing agreement, the marketing fees derived by the
developer thereof shall be subject to income tax imposed under Section 27 (A) of the
Tax Code of 1997, as amended, and consequently, to the withholding tax imposed
under Revenue Regulations No. 2-98, as amended, and to the VAT imposed under
Section 108 of the same Tax Code. (BIR Ruling DA(JV-020)537-2009 dated September
14, 2009)
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,

(SGD.) KIM S. JACINTO-HENARES


Commissioner of Internal Revenue

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