BIR Ruling [DA-145-02]

September 04, 2002 BIR RULING [DA-145-02] Santos & Santos Law Offices Suite F3, 4/F, JAKA II Building Legaspi Street Legaspi Village Makati City Attention: Atty. Susan M. Santos Gentlemen : This refers to your letter dated August 28, 2002 stating that Hanjin Engineering & Construction Co., Ltd. (Hanjin) is a corporation duly organized and existing under and by virtue of the laws of Korea; that while Itochu Corporation (Itochu) is a corporation duly organized and existing under and by virtue of the laws of Japan; that sometime in 1997, Hanjin and Itochu established a joint venture agreement to undertake the construction of the Metro Manila Strategic Mass Rail Transit Development (Line 2) Project particularly Construction Packages P-2 (Substructure) and P-3 (Superstructure and Stations); that on the same year, the Hanjin-Itochu joint venture entered into contracts with the Light Rail Transit Authority (LRTA), a government owned and controlled corporation created under Executive Order No. 603, for the implementation of the afore-mentioned construction packages; that the financing for the said construction packages were made available through the Japan Bank for International Cooperation (JBIC), formerly known as the Overseas Economic Cooperation Fund (OECF), funding by means of the 21st Yen Credit Package extended to the Philippine government; and that in support of your request, you have submitted to the following documents: (1) Contracts for the Metro Manila Strategic Mass Rail Transit Development (Line 2) Project, Package P-2: Substructure and Package P-3: Superstructure and Stations; 2) Joint Venture Agreement between Hanjin and Itochu; and (3) Executive Order No. 603. In connection therewith, you now request for a ruling that the joint venture which was established to undertake construction projects, specifically, the Metro Manila Strategic Mass Rail Transit Development (Line 2) Project, Packages P-2 (Substructure) and P-3: (Superstructure and Stations) under the LRTA is exempt from the 2% creditable withholding tax. In reply thereto, please be informed that pursuant to Section 22(B) of the Tax Code of 1997, the term "Corporation" includes 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. In view thereof, this Office holds that the Hanjin-Itochu Joint Venture/Consortium is exempt from income tax pursuant to Sections 22(B) and 27 of the Tax Code of 1997. For the same reason, gross payments to the joint venture/consortium from the LRTA created under Executive Order No. 603 are not likewise subject to the creditable withholding tax prescribed under Section 57(B) of the Tax Code of 1997. However, each of the venturers is liable for the payment of the corporate income tax imposed under Sections 27 and 28 of the Tax Code of 1997, on their respective earnings derived from the above-mentioned construction project. ( BIR Ruling No. 107-90 dated May 29, 1990 ). Moreover, .Hanjin and Itochu enjoying the status of foreign corporations doing business in the Philippines, shall be subject to the 32% corporate income tax on its taxable income derived from the same construction project pursuant to Section 28(A)(1) of the Tax Code of 1997. ( BIR Ruling No. 115-86 ) Finally, as a contractor, the joint venture shall be subject to the 10% VAT under Section 108(A) of the Tax Code of 1997. 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. CTAIHc Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service