BIR Ruling [DA-002-04]

January 6, 2004 BIR RULING [DA-002-04] Sections 22 (B), 27, RR 6-01 DA 192-01 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. M.F.A. Balili Gentlemen : This refers to your letter dated October 4, 2002 requesting for confirmation of your opinion that the payments to Obayashi-DMCI Joint Venture (JV) with respect to its construction of a building for the International School (IS) in Fort Bonifacio are not subject to the 2% creditable withholding tax under Revenue Regulations No. 6-2001, pursuant to Section 22(B) in relation to Section 27 of the Tax Code of 1997; and that any creditable withholding tax previously deducted by International School of Manila may be utilized by the JV members as credits against their respective income tax liability on their share in the project. SEHACI It is represented that Obayashi Philippines Corporation (Obayashi), is a corporation duly registered and organized under the laws of the Philippines with office address 7th Floor, Corinthian Plaza, Paseo de Roxas, Makati City; that on the other hand, D.M. Consunji, Inc. (DMCI), is likewise a corporation duly registered and organized under the laws of the Republic of the Philippines with office address at 2281 Don Chino Roces Avenue Extension, Makati City; that on October 24, 2000, Obayashi and DMCI entered into an agreement to form an unincorporated joint venture for the specific purpose of submitting a bid for the construction of the New Campus Development International School of Manila at Fort Bonifacio (hereinafter referred to as the "Project"); that subsequently, the JV was awarded the aforementioned Project and pursuant thereto the International School of Manila made several payments to the JV, which payments have been subjected to the 2% expanded withholding tax, notwithstanding the fact that IS was properly informed that payments to the joint venture should not have been subjected to EWT because the joint venture is not a taxable entity; and that IS Manila issued Certificates of Creditable Withholding Tax at Source (BIR Form No. 2307) naming Obayashi-DMCI Joint Venture as payee for the amount withheld. In reply thereto, please be informed that the Joint Venture Agreement entered into by and between Obayashi and DMCI is not subject to corporate income tax under Section 27(A) of the Tax Code of 1997. Consequently, gross payments made to the JV are not subject to the 2% creditable withholding tax imposed under Revenue Regulations No. 6-2001. Moreover, any amount previously deducted by the International School of Manila, as creditable withholding tax, may be utilized by the JV members as credits against their respective income tax liability on their share in the project. In this regard, Section 22(B) of the Tax Code of 1997 defines the term corporation which 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. Corollarily, Presidential Decree No. 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 JV entered into by and between Obayashi and DMCI is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. Consequently, gross payments made to the JV are not subject to the 2% creditable withholding tax imposed under Revenue Regulations No. 6-2001. ( BIR Ruling DA-192-October 17, 2001 ) It is understood, however, that 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. ( BIR Ruling No. 18-99 dated February 11, 1999 ) For this reason, Obayashi and DMCI both being domestic corporations are subject to corporate income tax under Section 27 of the Tax Code of 1997. Furthermore, Obayashi and DMCI should file their separate corporate income tax returns on the net revenues derived from the project and pay the corresponding tax due. Accordingly, the co-venturers being separately liable for corporate income tax on their respective income derived by them from the construction project, this Office holds that your opinion that Obayashi and DMCI may utilize the amount previously withheld by IS, in accordance with the following procedure: (i) the amount withheld by IS appearing in the Certificate of Creditable Withholding Tax Withheld at Source (BIR Form 2307) issued by IS to the JV shall be apportioned between DMCI and Obayashi in proportion to their joint venture interest, to wit: 60% to Obayashi and 40% to DMCI; and (ii) the corresponding share of each of the partners may be claimed as credits against their respective income tax liability on their share in the project. 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. cISAHT Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group