Hanjin-EEI Joint Venture

January 15, 2009 BIR RULING [DA-(JV-003) 020-09] Sec. 22; DA-021-01; DA-131-07 Hanjin-EEI Joint Venture 12/F Hanjinphil Bldg. No. 1128 University Parkway North Bonifacio Global City, Taguig City Attention: Mr. Shin Young Yoon Commercial and Finance Manager Gentlemen : This refers to your undated letter which was received by this Office on October 17, 2008 and supplemental letter dated January 5, 2009 received by this Office on January 6, 2009, requesting for a ruling on the tax consequences that may arise during the operation of Hanjin-EEI Joint Venture. DEICTS The facts as represented are as follows: Hanjin-EEI Joint Venture ("Joint Venture") is an unincorporated joint venture composed of Hanjin Heavy Industries & Construction Co. Ltd. ("Hanjin") and EEI Corporation ("EEI"). The Joint Venture was formed for the purpose of entering a construction project with the International Cargo Terminal Services Inc., ("ICTSI"). The Co-venturers are also the sub-contractors of the Joint Venture. Further, the Joint Venture was registered with the Bureau of Internal Revenue as a value added taxpayer and as a result thereof, the Joint Venture was able to issue common VAT invoices and official receipts for all payments made to it by ICTSI. On the other hand, the co-venturers issue their respective VAT invoices and official receipts upon receipt of their share of the contract price. On the basis of the foregoing facts, you requested for a confirmation of the opinion on the following: 1. The Joint Venture having been formed solely for the purpose of undertaking construction project is not subject to corporate income tax under Section 27 (A) and 28 (B) of the National Internal Revenue Code (NIRC) of 1997 since it does not fall under the term "corporation" as defined under Section 22 (B) of the NIRC; 2. Since the Joint Venture is not subject to the corporate income tax, the payment to be made by ICTSI, owner of the project to the Joint Venture shall not be subject to the 2% creditable expanded withholding tax under Section 57 (B) of the NIRC of 1997 as implemented by Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001; 3. Being exempt from corporate income tax, the Joint Venture is not required to file the Quarterly and Final Adjustment Returns with the BIR, but in lieu thereof, the Joint Venture shall be required to file an Annual Information Return; ScTIAH 4. Each Joint Venture member shall be liable for the payment of their respective corporate income taxes under Sections 27 and 28 of the NIRC of 1997 with respect to the income derived from the Joint Venture; 5. The Joint Venture being a VAT registered taxpayer may credit against its output VAT, the input tax it will pay on its purchases of goods or services from the Joint Venture members and other suppliers provided these are evidenced by VAT registered invoices or receipts issued in the name of the Joint Venture; 6. The Joint Venture will not be a withholding agent for withholding tax on compensation as it will not directly employ workers because under the Addendum it is the Joint Venture members that will be responsible for its own scope of work which includes hiring of workers for the project, bears their own cost and expenses; 7. The Joint Venture is a withholding agent under Revenue Regulations (RR) 2-98 as amended by RR 6-2001 for the 2% expanded withholding tax on its payments to its Joint Venture Members corresponding to their share in the contract price based on the scope of work performed by each member; and 8. The Joint Venture shall maintain its own books of accounts, print official receipts and file its VAT return. In reply thereto, please be informed as follows: 1. Hanjin-EEI Joint Venture is not a taxable entity. 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 participacion) , association or insurance companies, but does not include a general professional partnership 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 between Hanjin and EEI for the purpose of entering a construction project with the ICTSI is exempt from corporate income tax under Section 27 (A) of the Tax Code of 1997. IDATCE Since the Joint Venture is exempt from corporate income tax, the gross payments to said joint venture shall not be subject to the 2% creditable withholding tax under Section 2.57.2 (E) of Revenue Regulations No. 2-98, as amended by Revenue Regulation No. 6-2001, as amended. 2. Though the Joint Venture is exempt from corporate taxation, said exemption does not cover the co-venturers, Hanjin and EEI. The Co-venturers are separately subject to the regular corporate income tax imposed under Section 27 (A) of the Tax Code of 1997, on their taxable income during each taxable year respectively derived by them arising from the construction project undertaken by the Joint Venture. 3. As it is not considered a taxable corporation, a joint venture is only required to file an annual information return in lieu of the quarterly and final corporate income tax returns. The Joint Venture will only be required to file an annual information return in lieu of the quarterly and final corporate income tax returns, because under Section 52 (A) and 76, both of the Tax Code of 1997, only corporations subject to tax are required to file said returns. (BIR Ruling No. DA-021-2001 dated February 16, 2001). 4. As an unincorporated non-taxable joint venture, it may register as a VAT taxpayer with the appropriate Revenue District Office where the principal place of business is located. Furthermore, the said Joint Venture has to maintain and register its books of accounts and receipts even though it is not a separate entity for income tax purposes. (BIR Ruling 131-07 dated March 2, 2007) 5. The joint venture may credit against its output VAT the input VAT derived from the separate domestic purchases of goods and services by the joint venture members. (BIR Ruling 131-07, supra. ) To enable the joint venture to credit against its output VAT the input VAT derived from the separate domestic purchases of goods and services by the joint venture members, the invoices and/or receipts issued by the third parties or subcontractors must be issued to the consortium. In addition, to support the joint venture's input tax credit the VAT registered invoices and/or receipts issued by the third parties or sub-contractors must comply with the invoicing requirements as provided in Section 113 of the Tax Code of 1997, as amended. 6. Under the Agreement, the Joint Venture will not be hiring any workers since it is the Joint Venture members in their capacity as subcontractors that will be employing the services of workers to perform the scope of work. With this set up, the Joint Venture will not be an employer paying any compensation subject to the Withholding Tax on Compensation under Sec. 2.78 of RR 2-98, as amended. 7. The Joint Venture is a withholding agent under Sec 2.57.2 of RR 2-98, as amended by RR 6-2001, for the 2% expanded withholding tax on its income payments to the Joint Venture members. 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 null and void. ASICDH Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service