SGV & Co.

July 14, 2008 BIR RULING [DA-(JV-010) 030-08] Section 22 (B); DA-131-2007 SGV & Co. 6760 Ayala Avenue Makati City Attention: Ms. Veronica A. Santos Tax Division Gentlemen : This refers to your letter dated January 23, 2008 requesting in behalf of your client, Ong Partners, L.L.C. ("OPLLC") for a confirmation that an unincorporated joint venture formed for the purpose of undertaking a construction project is not subject to income tax pursuant to Section 22 (B) of the Tax Code of 1997, as amended. It is represented that OPLLC is a non-resident foreign equity limited liability company organized and existing under the laws of the State of New Jersey, United States of America with registered offices at 230 Friar Lane, Mountainside, New Jersey, U.S.A.; that William Uy Construction Corporation ("WUCC") is a construction and general contracting corporation organized and existing under the laws of the Philippines, with principal offices at Metro 74, Robert Corner Harrison Street, Pasay City, Philippines; that on January 16, 2006, the general construction contract for the construction of Stage II, Phase 1 of the Southern Tagalog Arterial Road (STAR) Project, consisting of the construction of 19.74 kilometers, more or less, of concrete road stretching from Lipa City to Batangas City (STAR PROJECT), was awarded by the concession holder thereof, STAR Infrastructure Development Corporation (SIDC) to WUCC; that the contract allowed WUCC to form a consortium with the other entities in undertaking the STAR PROJECT; that on June 26, 2006, OPLLC and WUCC decided to pool their respective assets and resources, in the form of funds, equipment and services and executed a Joint Venture Agreement for the purpose of forming an Unincorporated Joint Venture that would serve as the main contractor for the construction of the STAR Project; that under the JVA, OPLLC shall provide an aggregate amount of Thirty Million Pesos (P30,000,000.00) to fund the operational and administrative requirements of the UJV; that all such funding contributed by OPLLC shall be placed in an account to be reopened and established by the Parties in the name of the UJV; that WUCC shall contribute construction equipment as well as its technical expertise and experience in the fields of construction and general contracting, through the provision of its personnel; and that WUCC shall be in charge of the day-to-day administrative, managerial and technical operations of the UJV. SaIACT On the basis of the foregoing facts, you now request for a confirmation of your opinion on the following: 1. That an unincorporated joint venture formed for the purpose of undertaking a construction project is not subject to income tax pursuant to Section 22 (B) of the Tax Code of 1997; 2. That the payment made by SIDC to the UJV shall also not be subject to the 2% expanded withholding tax prescribed under Section 57 (B) of the Tax Code of 1997 as implemented by Revenue Regulations No. 2-98, as amended, since the UJV is not subject to corporate income tax; 3. That being exempt from the corporate income tax, the UJV is not required to file quarterly and final adjustment income tax returns with the Bureau of Internal Revenue, but in lieu thereof, the UJV shall only be required to file an annual information return. 4. That the UJV may claim as VAT input credit against its output VAT, the VAT it will pay on its importations and purchases of goods or services which are evidenced by VAT registered invoices and receipts. Accordingly, the UJV may credit against its output VAT the input VAT derived from the separate domestic purchases of goods and services by the UJV members made on behalf of the UJV. Furthermore, the UJV is entitled to claim for refund any excess/unapplied input VAT of the UJV upon completion of the work. In reply please be informed that: 1. 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 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. Considering that the joint venture or consortium formed by and between OPLLC and WUCC for the purpose of undertaking the construction of the STAR Project is excluded from the aforequoted definition of taxable corporation, this Office is of the opinion as it hereby holds that the joint venture is not subject to the regular corporate income tax under Section 27 (A) of the Tax Code of 1997. The co-venturers, nonetheless, are liable for the payment of the corporate income tax on their respective earnings derived from the above-mentioned construction project. ECISAD 2. 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 Regulations No. 6-2001, as amended. 3. 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, the Joint Venture may register as a VAT taxpayer with the appropriate Revenue District Office where the principal place of business is located. However, you should furnish said Office the registration requirements stated in Revenue Memorandum Order (RMO) No. 54-98. 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. In BIR Ruling No. 307-82 dated December 1, 1982, this Office held that: ". . . a joint venture or consortium was formed for the purpose of undertaking a construction project. . . . Moreover, since all corporations, companies, partnerships or persons required by law to pay internal revenue taxes, are required to keep books of accounts pursuant to Section 321 of the Tax Code, as implemented by Revenue Regulations No. V-1, otherwise known as the "Bookkeeping Regulations", the joint venture is, therefore, required to register with this Office the joint venture's books of accounts, invoices and receipts. . . .". In the case of the Ong Partners, L.L.C., the non-resident foreign co-venturer, its services in the joint venture is not subject to VAT pursuant to Section 105 of the Tax Code of 1997, as amended, since VAT is imposed only on sale of goods and services performed in the Philippines. Ong Partners, L.L.C. shall be subject to income tax on the gains to be derived by it as a co-venturer from said earnings in the construction project since the transaction involved is located in the Philippines. Under Section 57 of the Tax Code of 1997, as amended, gains, profits and income from the sale of real property located in the Philippines are considered income from sources within the Philippines. HcaDIA However, the co-venturers or consortium members shall be subject to the regular corporate income tax on their taxable income during its taxable year respectively derived by them from the aforesaid joint venture project. (BIR Ruling No. 18-99 dated February 11, 1999). Gross sales or receipts separately invoiced by the joint venture to the third party shall be subject to the 12% VAT. 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. The invoice and/or official receipt must indicate the purchaser of the goods and/or services as follows: "Sold to (name of co-venturer) as member of the Joint Venture." The VAT-registered invoices must state as follows: "Description of Articles Unit Price Total xxx xxx xxx "For the specific scope of work of (name of joint venture/consortium member) for the construction of Stage II, Phase 1 of the Southern Tagalog Arterial Road (STAR) Project." The VAT official receipts must state as follows: "Received the amount of _________ as payment for services to (name of joint venture/consortium member) as member of the ________ Joint Venture for its specific scope of work in the construction of Stage II, Phase 1 of the Southern Tagalog Arterial Road (STAR) Project." 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. Any unutilized input VAT of the joint venture cannot be treated and recognized as cost by the co-venturers for income tax purposes. The unapplied input VAT of the joint venture, if any, may, however, be the subject of a tax credit or refund pursuant to Section 4.106-1 of Revenue Regulations No. 7-95 (BIR Ruling No. 002-97 dated January 14, 1997). This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. STaAcC Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service