Agan and Montenegro Law Offices

September 15, 2008 BIR RULING [DA-(JV-028) 220-08] 22 (B); 113; 002-97; DA-272-2005 Agan and Montenegro Law Offices 3rd Floor, P&L Bldg., 116 Legazpi St. Legazpi Village, Makati City Attention: Attys. Rommel S. Agan and J. Carlito M. Montenegro Gentlemen : This refers to your letter dated June 18, 2008 requesting on behalf of your client, All Communication Consultancy & Techniservices, Inc. (hereinafter "ACCTI" for brevity), for a confirmatory ruling on the income tax consequence and value-added tax (VAT) invoicing requirements relative to the joint venture agreement entered into by and between ACCTI and Japan Radio Co. Ltd. (hereinafter "JRC" for brevity), thereby forming the unincorporated joint venture (JV) known as "ACCTI-JRC Joint Venture solely for the purpose of participating in the bidding and securing the contract for the Supply and Installation of Integrated Water Management System for Bohol Irrigation Project of the National Irrigation Administration (NIA). acIASE The facts as you represented are as follows: ACCTI is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines with office address at 24 Legal Street, GSIS Village, Project 8, Quezon City. On the other hand, JRC is a corporation duly organized and existing under and by virtue of the laws of Japan with registered office at Nittochi Nishi-Shinjuku Building, 10-1, Nishi-Shinjuku 6-chome, Shinjuku-ku, Tokyo, Japan. On November 23, 2007, a Joint Venture Agreement was executed by and between ACCTI and JRC for the sole purpose of submitting bid proposals upon the invitation of the NIA for the "Supply and Installation of Integrated Water Management System for Bohol Irrigation Project Stage II, Contract No. 2BHIPIS-2 (the "Project"). During the bidding last November 27, 2007, NIA found that ACCTI-JRC Joint Venture offered the lowest complying bid in accordance with the bid documents. NIA further found the offer of the JV to be fair, reasonable and most advantageous to the government. On the basis of the foregoing facts, you now request for a confirmatory ruling relative to the following issues: 1. That the JV, having been formed for the sole purpose of undertaking the Project is not subject to the corporate income tax under Sections 27 (A) and 28 (B) of the Tax Code of 1997 since it does not fall within the term "corporation" as defined under Section 22 (B) of the said Tax Code; 2. That since the JV is not subject to the corporate income tax, the payments to be made by NIA shall also not be subject to the creditable withholding tax prescribed under Section 57 (B) of the 1997 Tax Code, as implemented by Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001; 3. That being exempt from the corporate income tax, the JV is not required to file quarterly and final adjustment income tax returns with the Bureau of Internal Revenue (BIR), but in lieu thereof, the JV shall only be required to file an annual information return; and 4. That the JV may claim as VAT input credit against its output VAT, the VAT it will pay on its importations and purchases of goods or services from the JV member and third party sub-contractors, which are evidenced by VAT registered invoices and receipts. Furthermore, that the JV is entitled to claim for refund any excess/unapplied input VAT of the JV upon the completion of the project. AcHaTE 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), 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. Considering the clear provision of Sec. 22 (B) which manifests the intention of the legislature to exclude from the definition of taxable corporation joint venture/s (or consortium) formed for the purpose of undertaking construction projects, this Office hereby confirms your opinion that the JV by and between ACCTI and JRC is not subject to the regular corporate income tax under Sections 27 (A) and 28 (B) of the Tax Code of 1997. However, for VAT purposes, the joint venture (or consortium) is by itself a taxable entity. The co-venturers, nonetheless, are liable for the payment of the corporate income tax on their respective earnings derived from the above-mentioned project. 2. Since the JV 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 RR No. 2-98, as amended by RR No. 6-2001, as amended. 3. The JV will only be required to file an annual information return in lieu of the quarterly and final corporate income tax returns, because under Sections 52 (A) and 76, both of the Tax Code of 1997, only corporations subject to tax is required to file said tax returns. (BIR Ruling No. DA-021-2001 dated February 16, 2001) 4. As an unincorporated non-taxable joint venture, the JV may register as a VAT taxpayer with the appropriate Revenue District Office (RDO) where the principal place of business is located. However, your client should furnish said Office the registration requirements stated in Revenue Memorandum Order (RMO) No. 54-98. Furthermore, the said JV 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 . . .". 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 Supply and Installation of Integrated Water Management System for Bohol Irrigation Project Stage II, Contract No. 2BHIPIS-2." 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 Supply and Installation of Integrated Water Management System for Bohol Irrigation Project Stage II, Contract No. 2BHIPIS-2." 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. DA-272-2005 dated June 21, 2005) EcATDH 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service