A.M. Oreta & Co., Inc.

February 9, 2010 BIR RULING [DA-(JV-008) 028-10] DA354-04; DA639-06 A.M. Oreta & Co., Inc. 5th Floor Ermita Building Arquiza cor. Alhambra Street Ermita, Manila Attention: Mr. Allen Son L. Tan Vice President Administration Gentlemen : This refers to your letter dated January 7, 2010 stating that A.M. Oreta & Co., Inc. and IBC International Builders Corporation (Joint Venture Partners) are both corporations organized and existing under the laws of the Philippines; that the Department of Public Works and Highways (DPWH) has advertised for public bidding the concreting of Iloilo City-Caticlan Highway (Pototan-Passi Capiz Boundary Section) (Km. 36+485-Km. 63+000) with exception, Iloilo Side; that the DPWH is inviting interested contractors to prequalify and if prequalified, to bid for the above-mentioned project; that the Joint Venture Partners believe that they can best maximize their chances of qualifying in said project for public bidding and can satisfactorily prosecute the project should they win in the bidding and awarded the contract by the DPWH; that on February 28, 2008, a Joint Venture Agreement (JVA) was entered into by the Joint Venture Partners for the exclusive purpose of qualifying for and participating in the aforesaid public bidding of the project and actually undertaking the construction work; and that the salient features of the said JVA are as follows: 1. The Joint Venture Partners hereby mutually bind each other to contribute to the Joint Venture, 51% for A.M. Oreta & Co., Inc. and 49% for IBC International Builders Corporation. All necessary capital, equipment, technical personnel for supervision, and other efforts and resources for the proper prosecution or implementation of the projects in the event that the Joint Venture is awarded the contract for said project, and further bind themselves at all times during the existence of the Joint Venture to extend to each other their respective fullest cooperation and best efforts towards the satisfactory construction of the project in accordance with the approved plans and specifications and to complete the same within the approved work schedule. 2. The net profits or losses of the Joint Venture shall likewise be divided between the Joint Venture Partners on 51% for A.M. Oreta & Co., Inc. and 49% for IBC International Builders Corporation. STcDIE Based on the foregoing representations, you now request for exemption from the payment of withholding tax on joint venture undertaking the construction of government projects as prescribed in Section 2.57.5 (B) (5) of Revenue Regulations No. 2-98, as amended. In reply thereto, please be informed that Section 2.57.5 (B) (5) of Revenue Regulations No. 2-98, as amended, provides that "Sec. 2.57.5. Exemption from Withholding. The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments made to the following: (A) . . . (B) Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following: xxx xxx xxx (5) Joint ventures or consortium formed for the purpose of undertaking construction projects or engaged in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the government." In stressing the rationale of the above-cited provisions, this Office elucidated the matter in BIR Ruling No. DA639-06 dated October 7, 2006, citing BIR Ruling No. 354-04, as follows: ". . ., the Joint Venture of R.D. Interior Junior Construction and Philworks Construction and Supply formed as a result of the JVA for the construction of the above government project is not subject to the corporate income tax under Section 27(A) of the Tax Code of 1997. Consequently, gross payments received by said joint venture is not subject to the 2% (then 1%) expanded withholding tax prescribed by Section 57(B) of the Tax Code of 1997, and as implemented by Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001. Considering the foregoing, the joint venture of R.D. Interior Junior Construction and Philworks Construction and Supply for the construction and development of the Project will not create a taxable joint venture within the meaning of Section 22(B), in relation to Section 27(A) of the Tax Code of 1997. xxx xxx xxx" Considering that the instant case is in all fours similar to the above-cited rulings, this Office holds that the joint venture entered into by A.M. Oreta & Co., Inc. and IBC International Builders Corporation undertaking government projects is EXEMPT from the payment of withholding tax as prescribed in Section 2.57.5 (B) (5) of Revenue Regulations No. 2-98, as amended. SCEDAI Accordingly, the joint venture, being exempt from corporate income tax is not required to file quarterly and final or adjustment income tax returns. However, the co-venturers are separately subject to the 30% corporate income tax on their taxable income during each taxable year respectively derived by them from the aforesaid joint venture project. In addition to the foregoing, as a public works contractor, the joint venture shall be subject to the final withholding value-added tax at the rate of five percent (5%) pursuant to Section 114 (C) of the Tax Code of 1997, as amended by Republic Act No. 9337, as implemented by Revenue Regulations No. 4.114-2 (a) of Revenue Regulations No. 16-2005, as amended. 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. Very truly yours, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal & Inspection Group