R.D. Interior Junior Construction/Brostan Construction and Development Joint Venture

February 16, 2009 BIR RULING [DA-(JV-009) 082-09] Sec. 22; DA-021-01; DA-131-07; DA (JV-003) 020-2009 R.D. Interior Junior Construction/Brostan Construction and Development Joint Venture MO5 Prince Jun Condominium 42 Timog Avenue, Quezon City Attention: Mr. Ricardo D. Interior, Jr. Authorized Managing Officer Gentlemen : This refers to your letter requesting for a ruling on the tax consequences that may arise during the operation of R.D. Interior Jr. Construction/Brostan Construction and Development Joint Venture. The facts as represented are as follows: R.D. Interior Jr. Construction/Brostan Construction and Development Joint Venture ("Joint Venture") is an unincorporated joint venture. The Joint Venture was formed for the purpose undertaking construction project pursuant to a service contract with the government executed on September 5, 2008, specifically, the Pagadian Airport Development Project of 2008. The development project comprised the following construction services: (1) Concreting of Runway with Shoulder Grade Correction, (2) Concreting of Apron (75m x 114m), and Improvement of Drainage System. The co-venturers are the sub-contractors of the Joint Venture. Both are registered with the Bureau of Internal Revenue as a value added taxpayers. In reply thereto, please be informed as follows: 1. R.D. Interior Jr. Construction/Brostan Construction and Development 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 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 above Joint Venture formed for the purpose of entering a construction project for the development of the Pagadian Airport is exempt from corporate income tax under Section 27 (A) of the Tax Code of 1997. 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. (BIR Ruling No. DA (JV-003) 020-2009 dated January 15, 2009] 2. Though the Joint Venture is exempt from corporate taxation, said exemption does not cover the co-venturers, R.D. Interior Jr. Construction and Brostan Construction and Development. 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 unincorporated non-taxable joint venture, the Joint Venture 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. 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. Very truly yours Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service