Agan and Montenegro Law Offices

March 2, 2007 BIR RULING [DA-131-07] 113; DA-240-2005/DA-272-2005 Agan and Montenegro Law Offices 3rd Floor, P&L Bldg., 116 Legazpi St. Legazpi Village, Makati City Attention: Attys. Rommel S. Agan and J. Carlito M. Montenegro Gentlemen : This refers to your letter dated January 24, 2007 requesting on behalf of your client, Japan Radio Co., Ltd. (JRC for brevity), for a confirmatory ruling on the tax consequences and value-added tax invoicing requirements relative to the joint venture agreement entered into by and between JRC and Sta. Clara International Corporation (hereinafter "Sta. Clara" for brevity), thereby forming the unincorporated joint venture ("JV") known as "JRC-Sta. Clara Joint Venture", solely for the purpose of undertaking a construction project of the Philippine Ports Authority (PPA). The facts as you represented are as follows: JRC is a corporation duly organized and existing under and by virtue of the laws of Japan with registered office at Nittochi Nishi-Shinjuku Building, 10-1, Nishi-Shinjuku 6-chome, Shinjuku-ku, Tokyo 160-0023, Japan. On the other hand, Sta. Clara is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines with office address at 97 EDSA Guadalupe, Makati City. In December 2006, a Joint Venture Agreement was executed by and between JRC and Sta. Clara for the sole purpose of submitting bid proposals upon the invitation of the PPA for the "Supply and Installation of Vessel Traffic Management System (VTMS), Closed Circuit Television System (CCTV), Gate Management System (GMS) for the Total Port Security System for Batangas Port Development Project Phase II". After proper evaluation and determination of the lowest and responsive supplier, the JV was nominated by the PPA and its Consultant to the Shimizu to the Shimizu Corporation/F.F. Cruz & Company, Inc. Joint Venture as the supplier for the said Gate Management, VTMS & CCTV equipment for the Batangas Port Project Phase II by way of supplementary work in variation contract. Thus, on 23 January 2007, as Supply Contract Agreement was executed by and between the Shimizu Corporation/F.F. Cruz & Company, Inc. Joint Venture and Japan Radio Company Limited/Sta. Clara International Corporation Joint Venture. On the basis of the foregoing facts, you now request for a confirmation of your opinion on the following: 1. That the JRC-Sta. Clara Joint Venture, having been formed for the sole purpose of undertaking construction projects is not subject to the corporate income tax under Section 27 (A) and 28 (B) of the National Internal Revenue Code (NIRC) of 1997 since it does not fall within the term "corporation" as defined under Section 22 (B) of the NIRC; 2. That since the JRC-Sta. Clara Joint Venture is not subject to the corporate income tax, the payment to be made by Shimizu Corporation/F.F. Cruz & Company, Inc. Joint Venture to the JV shall also not be subject to the two percent (2%) creditable expanded withholding tax prescribed under Section 57 (B) of the NIRC of 1997 as implemented by Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001; and 3. That being exempt from the corporate income tax, the JV is not required to file quarterly and final adjustment income tax returns with the Bureau of Internal Revenue, but in lieu thereof, the JV shall only be required to file an annual information return. 4. That the JV may claim as VAT input credit against its output VAT, the VAT it will pay on its importations and purchases of goods or services from the JV member and third party sub-contractors, which are evidenced by VAT registered invoices and receipts. Furthermore, that the JV is entitled to claim for refund any excess/unapplied input VAT of the JV upon the completion of the project. In reply please be informed that: 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), association 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. Considering that the joint venture or consortium formed by and between Japan Radio Co. Ltd. and Sta. Clara International Corporation for the purpose of undertaking the construction of the Project is excluded from the aforequoted definition of taxable corporation, this Office is of the opinion as it hereby holds that the joint venture is not subject to the regular corporate income tax under Section 27 (A) of the Tax Code of 1997. The co-venturers, nonetheless, are liable for the payment of the corporate income tax on their respective earnings derived from the above-mentioned construction project." 2. Since the Joint Venture is exempt from corporate income tax, the gross payments to said joint venture shall not be subject to the 2% creditable withholding tax under Section 2.57.2 (E) of Revenue Regulations No. 2-98, as amended by Revenue Regulation No. 6-2001, as amended. TDEASC 3. The Joint Venture will only be required to file an annual information return in lieu of the quarterly and final corporate income tax returns, because under Section 52 (A) and 76, both of the Tax Code of 1997, only corporations subject to tax are required to file said returns. (BIR Ruling No. DA-021-2001 dated February 16, 2001). 4. As an unincorporated non-taxable joint venture, the Joint Venture may register as a VAT taxpayer with the appropriate Revenue District Office where the principal place of business is located. However, you should furnish said Office the registration requirements stated in Revenue Memorandum Order (RMO) No. 54-98. Furthermore, the said Joint Venture has to maintain and register its books of accounts and receipts even though it is not a separate entity for income tax purposes. In BIR Ruling No. 307-82 dated December 1, 1982, this Office held that: ". . . a joint venture or consortium was formed for the purpose of undertaking a construction project. . . . Moreover, since all corporations, companies, partnerships or persons required by law to pay internal revenue taxes, are required to keep books of accounts pursuant to Section 321 of the Tax Code, as implemented by Revenue Regulations No. V-1, otherwise known as the "Bookkeeping Regulations", the joint venture is, therefore, required to register with this Office the joint venture's books of accounts, invoices and receipts . . .". However, the co-venturers or consortium members shall be subject to the regular corporate income tax on their taxable income during its taxable year respectively derived by them from the aforesaid joint venture project. (BIR Ruling No. 18-99 dated February 11, 1999). Gross sales or receipts separately invoiced by the joint venture to the third party shall be subject to the 12% VAT. To enable the joint venture to credit against its output VAT the input VAT derived from the separate domestic purchases of goods and services by the joint venture members, the invoices and/or receipts issued by the third parties or subcontractors must be issued to the consortium. The invoice and/or official receipt must indicate the purchaser of the goods and/or services as follows: "Sold to (name of co-venturer) as member of the Joint Venture." The VAT-registered invoices must state as follows: "Description of Articles Unit Price Total xxx xxx xxx "For the specific scope of work of (name of joint venture/consortium member) for the Supply and Installation of Vessel Traffic Management System (VTMS), Closed Circuit Television System (CCTV), Gate Management System (GMS) for the Total Port Security System for Batangas Port Development Project Phase II." The VAT official receipts must state as follows: "Received the amount of _________ as payment for services to (name of joint venture/consortium member) as member of the _________ Joint Venture for its specific scope of work in the Supply and Installation of Vessel Traffic Management System (VTMS), Closed Circuit Television System (CCTV), Gate Management System (GMS) for the Total Port Security for Batangas Port Development Project Phase II." SCDaET In addition, to support the joint venture's input tax credit, the VAT registered invoices and/or receipts issued by the third parties or sub-contractors must comply with the invoicing requirements as provided in Section 113 of the Tax Code of 1997. Any unutilized input VAT of the joint venture cannot be treated and recognized as cost by the co-venturers for income tax purposes. The unapplied input VAT of the joint venture, if any, may, however, be the subject of a tax credit or refund pursuant to Section 4.106-1 of Revenue Regulations No. 7-95 (BIR Ruling No. 002-97 dated January 14, 1997). This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service