BIR Ruling [DA-141-04]

March 29, 2004 BIR RULING [DA-141-04] Valdez Anigan & Associates Suite 700 Victoria Building 429 U.N. Avenue, Ermita Manila Attention: Atty. Arlene M. Anigan Gentlemen : This refers to your letter dated March 15, 2004 stating that Dingle II Consortium is a joint venture formed solely for the purpose of undertaking a project awarded by the NAPOCOR involving the dismantling/disassembly and packaging of the 110MW diesel plant at Pinamucan, and hauling, transporting and erecting the same in Dingle, Iloilo; that the consortium will not be registered with the Securities and Exchange Commission (SEC),however, each consortium member shall keep its own books of account; that the members of the said consortium are the following: 1). DM Consunji, Inc. (DMCI),a domestic corporation duly registered and organized under the laws of the Philippines with principal office at 2281 Pasong Tamo Extension, Makati City; 2) Home Construction, Inc.,a corporation organized and existing under the laws of the Philippines with principal office address at Suite 503 Robinson Galleria Corporate Center, EDSA corner Ortigas Avenue, Quezon City; 3) BENDIMIL Construction & Development Corporation, a corporation organized and existing under the laws of the Philippines with principal office address at Summerhill Subdivision, Pasonanca, Zamboanga City; and 4) Alsons Power Holdings Corporation, a corporation organized and existing under the laws of the Philippines with principal address at 2286 Pasong Tamo Extension, Makati City. that in order to achieve the project's purpose, the members of the consortium have agreed to undertake its own work scope independent of the other members; that each member of the consortium will enter into separate contracts with third parties and/or suppliers of goods and/or services for its own work scope; that these suppliers of goods and/or services will be the ones who will issue to the consortium members registered invoices/official receipts; and that the members of the consortium shall issue its own registered invoice/official receipts to the consortium for the sale of its services/goods to the latter for the specific work scope it has accomplished. Based on the foregoing representations, you now request for confirmation of your opinion that the payments to be received and already received by the consortium relative to the above-mentioned project is not subject to income tax and consequently to the expanded withholding tax; and that each of the member of the consortium may utilize the amount previously withheld by NAPOCOR as credits against their respective income tax liability in proportion to the members joint interest in the consortium. In reply thereto, please be informed that 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 participation ),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. It is to be emphasized, however, that P.D. 929 excluded joint venture formed for the purpose of undertaking construction projects from the definition of the term "Corporation" because (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. 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 Joint Venture Agreement entered into by the above-named members of the Consortium involving the dismantling/disassembly and packaging of the 110MW diesel plant at Pinamucan, and hauling, transporting and erecting the same in Dingle, Iloilo is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997 and to the 2% expanded withholding tax prescribed in Revenue Regulations No. 6-2001. However, the co-venturers are separately subject to the corporate income taxes prescribed in Section 27(A) of the Tax Code of 1997 on their respective taxable income during each taxable year derived by them from the aforesaid consortium. Thus, each of the members of the consortium may utilize the amount previously withheld by NAPOCOR as appearing in the Certificate of Withholding Tax Withheld at Source (BIR Form 2307) in proportion to their joint interest in the consortium. Accordingly, the corresponding share of each of the member 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. cSTHAC Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service