BIR Ruling [DA-028-97]

January 15, 1997 BIR RULING [DA-028-97] Sycip, Gorres, Velayo & Co. 6760 Ayala Avenue, Makati Metro Manila Attention: Atty . E . C . Alcantara Tax Division Gentlemen : This refers to your letter dated 21 October 1996 requesting for confirmation of your opinion regarding the tax implications of a joint venture between the Philippine branches of GRANDI LAVORI FINCOSIT SPA ("GLF") and SOCIETA ESECUZIONE LAVOR INDRAULICI SPA ("SELI"). It is represented that on June 20, 1995, the Metropolitan Waterworks and Sewerage System ("MWSS") awarded Contract No. UAT-004 for the construction of Umiray-Angat transbasin Tunnel and Ancillary Facilities (the "Umiray Contract") to the consortium (the "Consortium") of GLF, SELI and J.V. Angeles ("JVACC") subject to the compliance with certain terms and conditions; that to implement the MWSS project, GLF, SELI and JVACC have entered into a Joint Venture Agreement on January 23, 1996 under which the execution of the Umiray Contract was divided into 2 distinct parts; that works outside the tunnel ("Outside Works") shall be performed by JVACC while works inside the tunnel ("Inside Works") were to be performed by GLF and SELI; that in compliance with Philippine law, GLF and SELI set up their Philippine branches to execute the Inside Works GLF Phil. and SELI-Phil. respectively; that in BIR Ruling No. DA-269-96 dated July 24, 1996, the Bureau held that the aforesaid Consortium of GLF, SELI and JVACC is a non-taxable Joint Venture and, as such, is not subject to the 1% creditable withholding tax; that however, the same is subject to the 10% value added tax on its gross receipts as a contractor; that on July 12, 1996, your client, GLF and SELI entered into a separate Joint Venture Agreement to execute the Inside Works under which the parties agreed to a cost and profit sharing agreement; that the joint Venture Agreement allows each of the co-venturers complete authority to act on its behalf in relation to any matter arising out of the joint venture for the execution of the Inside Works with GLF-Phil. being the lead partner; that the Joint Venture Agreement also provides that all necessary working capital shall be furnished by both parties equally and that profits and losses from the joint venture shall be shared equally between GLF-Phil. and SELI-Phil. You now request confirmation on the following: "1. The Joint Venture Agreement entered into by GLF-Phil. and SELI-Phil. will be subject to the 35% corporate income tax which is based on net income; "2. When the Joint Venture distributes its net income after tax to its members, i.e., the Philippine branches of GLF and SELI, such distribution will not be subject to Philippine income tax; "3. The gross payment to the Joint Venture from the Consortium shall not be subject to the 1% creditable withholding taxes and the 10% VAT; "4. The Joint Venture itself will have to maintain separate books of account and financial records, and insofar as the income and cost of the taxable joint venture is connected, file a separate income tax; and "GLF-Phil. and SELI-Phil., as members of the taxable joint venture, must also have their own income tax return." "5. Each of GLF-Phil. and SELI-Phil. shall be subject to the 35% corporate tax on their taxable income derived from sources within the Philippines, except those which are subject to final tax or exempt from tax, and the 15% branch profit remittance tax when they remit their income to GLF and SELI in Italy." In reply, please be informed that this Office confirms your opinions based on the following: To constitute a "joint venture" certain factors are essential: (a) each party to the venture must make a contribution, not necessarily of capital, but of services, skills, knowledge, materials or money; (b) profits must be shared among parties; (c) there must be a joint proprietary interest and the right of mutual control over the subject matter of the enterprise; and (d) usually, there is a single business transaction rather than a general or continuous transaction" (Words and Phrases, Vol. 23, p. 230) As represented, under the joint venture Agreement, GLF-Phil. and SELI-Phil., undertake to contribute equally for the working capital and services. The parties likewise agree to share the profits and losses from the joint venture. They also agree to appoint their representative to the joint venture. And that the joint venture of GLF-Phil. and SELI Phil., shall be valid only for the duration of the Umiray Project. The Joint Venture Agreement entered into between by GLF-Phil. and SELI-Phil. to execute the Inside Works will create a joint venture subject to tax under Section 24(a) of the Tax Code, as amended, separate and distinct from GLF-Phil. and SELI-Phil. cdt Thus, the joint venture of GLF-Phil. and SELI-Phil. will have to maintain books of accounts and financial records and file its own income tax return separate from GLF-Phil. and SELI-Phil. Moreover, the share of GLF-Phil. and SELI-Phil. joint venture from the consortium with JVACC are income of the joint venture subjected to tax as abovementioned. Therefore, the distribution by the joint venture of its net income to the joint venturers, GLF-Phil. and SELI-Phil., shall be in the nature of intercorporate dividends, which are not subject to tax under Section 24(e)(4) of the Tax Code, as amended. As represented further, the separate joint venture of GLF-Phil. and SELI-Phil. merely assumed the undertaking of GLF and SELI under its Consortium Agreement with JVACC, which was ruled to be a non-taxable joint/consortium venture under BIR Ruling No. DA-269-96 dated July 24, 1996. This Office agrees that the payments from the consortium to the joint venture of GLF and SELI is likewise not subject to the 1% creditable withholding tax. In addition, the joint venture of GLF and SELI is not subject to the 10% VAT as the said tax is already imposed on the consortium of GLF, SELI and JVACC. On the other hand, Section 25(a)(5) of the Tax Code, as amended provides that any profit remitted by a branch to its head office shall be subject to a tax of 15%. Thus, any remittance by GLF-Phil. and SELI-Phil. of their branch profits to GLF and SELI is subject to the 15% branch profit remittance tax imposed under Section 25(a)(5) of the Tax Code, as amended, based on the actual profits remitted abroad. 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. (BIR Ruling No. 317-92 dated October 28, 1992) Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)