BIR Ruling [DA-259-04]

May 17, 2004 BIR RULING [DA-259-04] 22 (B) DA134-00 Cruz & Co., Inc. 800 De Los Santos Avenue Quezon City Attention: Mr. R.E. Guinto AVP-Finance Gentlemen : This refers to your letter dated March 3, 2000 stating that your company together with a local company, which is a subsidiary of a foreign Japanese contractor, had entered into a joint venture agreement for the purpose of bidding out a government contract; that the bidding turned out to be successful and you expect the contract to be awarded to you by the second semester; that before the project starts, you would like to be guided as to whether the said joint venture is subject to the following: "1. Secure a new Tax Identification Number (TIN); "2. Register its books of accounts with the BIR as a new Company; "3. Pay value-added tax (VAT) and corporate income tax; "4. Withholding taxes on earnings derived from the joint venture for distribution to the joint partners; "5. Other requirements by the BIR, which is normally, subject to a juridical company." In reply thereto, please be informed as follows: 1. Section 236(J) of the Tax Code of 1997 provides that any person required under the authority of the Tax Code to make, render or file a return, statement or other document shall be supplied with or assigned a Taxpayer Identification Number (TIN) which he shall indicate in such return, statement or document filed with the Bureau of Internal Revenue for his proper identification for tax purposes. Since a joint venture operates as a single entity to render service, which is subject to value-added tax pursuant to Section 108(A) of the Tax Code of 1997, said joint venture should be registered under the VAT law and shall be supplied with VAT Registration Certificate and assigned a TIN upon proper application with the BIR. 2. Section 3 of Revenue Regulations No. V-1, otherwise known as the Bookkeeping Regulations, provides that persons, which include natural persons and partnerships, associations companies or corporations, no matter how created or organized, required by law to pay internal revenue taxes are required to keep books of accounts. While a joint venture formed for the purpose of undertaking a construction project is exempt from the corporate income tax pursuant to Section 22(B) of the Tax Code of 1997 and therefore it is not required to file quarterly and final or adjustment returns with respect to income earned from the said project, it is nevertheless subject to the business tax like the 10% value-added tax for the services thus rendered. Accordingly, the joint venture is required to register with the Revenue District Office (RDO) concerned its books of accounts, invoices and receipts serially numbered in duplicate, showing the among other things, its name or style and business address, before starting its operation as a joint venture. ( BIR Ruling No. 307-82 dated December 13, 1982 ) 3. Section 22(B) of the Tax Code of 1997 provides that the term "corporation" shall include 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 a numerous rulings issued by the BIR, this Office had consistently ruled that a joint venture formed for the purpose of undertaking construction project is not subject to the corporate income tax prescribed in Section 27 of the Tax Code of 1997. Consequently, gross payments received by the said joint venture is not subject to the 1% [now 2%] creditable withholding tax prescribed in Section 57(B) of the said Code, as implemented by Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001, as further amended by Revenue Regulations No. 12-2001. However, the said joint venture is subject to the 10% value-added tax imposed under Section 108(A) of the said Code. ( BIR Ruling No. DA134-00 dated March 2, 2000; 098-94 dated April 22, 1994 ) IcHTAa 4. The allocation and distribution of their respective shares in the project in consideration for their respective contributions to the said agreements is not a taxable event and is not subject to income tax, withholding tax, value-added tax and documentary stamp tax because the allocation is a mere return of capital that each has contributed. Moreover, in the event that any party defer its right to receive a specific allocation to a later phase of the project for as long as allocation constitutes part of the total return of its capital, such deferment is still not subject to the aforementioned taxes. 5. We hope that we have sufficiently addressed your concerns. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group