BIR Ruling [DA-293-03]

September 3, 2003 BIR RULING [DA-293-03] Section 22 (B) DA 586-98; 57-96; & 20-82 SKI-First Balfour JV Hotel Drive Corner Estrella St. Makati City Attention: Mr. Garth J. Beeton Project Manager Gentlemen : This refers to your letter dated June 4, 2003 requesting for a ruling on the tax consequences of the Joint Venture Agreement ("JVA") entered by and between Summa Kumagai, Inc . ("SKI") and First Balfour Beatty Phils., Inc . ("First Balfour"), viz. : 1) Whether or not the joint venture is subject to corporate tax; 2) Whether or not the joint venture is subject to the creditable withholding tax under Revenue Regulations No. 2-98; and 3) Whether or not the Joint Venture is required to file quarterly and final adjustment returns with the BIR. Documents show that SKI, a legal entity organized and operating under the laws of the Philippines, with office address at 7/F, Sage House Building, 110 Herrera St., Legaspi Village, Makati City entered into a JVA with First Balfour, also a legal entity organized and operating under the laws of the Philippines, with office address at 2/F, Bonifacio Technology Center, 31st St. corner 2nd Ave., Crescent Park West, Bonifacio Global City, Taguig, Metro Manila; that under the JVA, SKI and First Balfour ("Parties") agree that they will jointly participate in the construction of Manansala Residential Condominium Block ("Project") at Rockwell Centre Manila, comprising of 41 storey building with 3 basements and 5 levels of podium parking for Rockwell Land; that the JVA provides for the following terms and conditions: 1. Each of the parties will place at the disposal of the Joint Venture such of its resources as may be required by the Management Board and the benefit of all its experience, technical knowledge and skill and shall bear its share of the responsibility and burden of completing the Contract including the provision of information advice and assistance; 2. The respective Financial Interests shall be: a) SKI 51% b) First Balfour 49% 3. The parties shall provide Working Capital in proportion to their respective Financial Interests; and 4. The profits of the Joint Venture may from time to time be distributed to the Parties in proportion to their Financial Interests or any adjustment or readjustment thereof; and that you are asking for a ruling since your employer, Rockwell Land, with office address at Rockwell Information Centre, Rockwell Drive cor. Estrella Street, Rockwell Centre, Makati City, is deducting withholding tax from income payments to you. In reply, please be informed as follows: 1) Pursuant to Section 22(B) of the Tax Code of 1997, 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. Such being the case, the joint venture formed as a result of the JVA by and between SKI and First Balfour for the construction of a residential condominium building is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997. In view thereof, it is our opinion that the joint venture is exempt from income tax pursuant to Sections 22(B) and 27(A), both of the Tax Code of 1997. However, the co-venturers are separately subject to the regular corporate income tax imposed under Sections 27(A) of the Tax Code of 1997, on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. 2) For the same reason in #1, gross payments to the joint venture are not likewise subject to the 2% withholding tax prescribed under Section 57(B) of the same Code, as implemented by Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2000 and 12-2000. 3) The joint venture being exempt from corporate income tax is not required to file quarterly and final or adjustment returns. In addition to the foregoing, the Summa Kumagai, Inc. First Balfour Beatty Phils., Inc. Joint Venture is subject to the 10% value added tax as contractor pursuant to 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service