BIR Ruling [DA-397-03]

November 4, 2003 BIR RULING [DA-397-03] Section 22 (B) DA-293-2003 First Balfour/Chemitreat Ptd. Ltd. JV 2/F, Hatch Asia Bldg., 31st Street IT Park, Fort Bonifacio Global City, Taguig Attention: Mr. Anthony L. Fernandez Managing Director Gentlemen : This refers to your letter dated September 29, 2003 requesting for a ruling on the tax consequences of the Consortium Agreement entered by and between First Balfour Beatty Philippines, Inc. ("First Balfour") and Chemitreat Private Limited ("Chemitreat"), 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, as amended by Revenue Regulations Nos. 6-2000 and 12-2000; and 3) Whether or not the Joint Venture is required to file quarterly and final adjustment returns. It is represented that First Balfour, a corporation duly organized and existing under the laws of the Philippines, with principal offices at 2/F, Bonifacio Technology Center, 31st Street corner 2nd Avenue, e-Square IT Park, Bonifacio Global City, Taguig, Metro Manila entered into a Consortium Agreement with Chemitreat, a corporation duly organized under the laws of Singapore with principal office at 28 Tuas Avenue 8, Singapore, 639243 and duly licensed to do business in the Philippines, and represented by Chemitreat Philippines, Inc.; that under the Consortium Agreement, First Balfour and Chemitreat ("Parties") agree that they will jointly participate in the design and construction of the community sanitation projects at Taguig, Metro Manila (Contract No. SP-05) and at the University of the Philippines, Quezon City (Contract No. SP-02), of the Metropolitan Waterworks and Sewerage System (MWSS); that the joint venture is an unincorporated joint venture not registered with the Securities and Exchange Commission but is a VAT-registered entity; that in the event that the consortium enters into a contract with the Manila Water Company, Inc. (MWCI) with office address at the Administration Building, 489 Katipunan Road, Balara, Quezon City, the Consortium Agreement provides for the following terms and conditions: 1. Each of the Party shall provide all supplies and services and carry out all work required for the proper fulfillment of its Scope of Work (Section 6.2); 2. It shall be the sole and entire responsibility of each Party to perform or have performed at its own cost all the obligations assumed by it under the Contract and Consortium Agreement and each Party shall take the profit or suffer the loss accruing from its Scope of Work (Section 6.3.1); 3. If a legitimate claim is made against the Parties or either of them under the Contract or otherwise in connection with the Project, reach Party shall be liable therefore to the extent that it has caused the claim (Section 6.4); and 4. The Parties agree that they shall be solely responsible for the sufficiency of their own estimates of cost and time related to their own Scope of Work (Section 6.5). 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/consortium formed as a result of the Consortium Agreement by and between First Balfour and Chemitreat for the design and construction of the community sanitation projects at Taguig, Metro Manila (Contract No. SP-05) and at the University of the Philippines, Quezon City (Contract No. SP-02), of the Metropolitan Waterworks and Sewerage System (MWSS) 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/consortium 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 projects. 2) For the same reason in #1, gross payments to the joint venture/consortium 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 Nos. 6-2000 and 12-2000. HCSEIT 3) The joint venture/consortium being exempt from corporate income tax is not required to file quarterly and final or adjustment returns. In addition to the foregoing, the First Balfour/Chemitreat Ptd. Ltd. 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