New Kanlaon Construction, Inc./

December 8, 2009 BIR RULING [DA-(JV-039) 752-09] 22 (B), 27 (A), RR 2-98; BIR Ruling No. 274-92; 057-96 New Kanlaon Construction, Inc./ J.E. Manalo & Co., Inc. Joint Venture Unit 305 Prestige Tower F. Ortigas, Jr. Road, Ortigas Center, Pasig City Attention: Mr. Erwin D. Roxas AVP Comptroller Mr. Antonio S. Evangelista Authorized Managing Officer Gentlemen : This refers to your letter dated July 30, 2009 requesting exemption of New Kanlaon Construction, Inc. and J.E. Manalo & Co., Inc. Joint Venture from income tax and 2% expanded withholding tax. It is represented that New Kanlaon Construction, Inc. with TIN 004-614-134-000, is a domestic corporation engaged in general construction business with principal office at Unit 305 Prestige Tower, F. Ortigas Jr. Road, Ortigas Center, Pasig City; that J.E. Manalo & Co., Inc., with TIN 000-282-755-000, is also a domestic corporation engaged in the business of general contractors and builders with principal office at 188 Bernal St. cor. C. Raymundo Avenue, Rosario, Pasig City; that both corporations are duly licensed contractors by the Philippine Contractors Accreditation Board; that said corporations has agreed to establish a joint venture named New Kanlaon Construction, Inc. and J.E. Manalo & Co., Inc. Joint Venture ("NKCI-JEMCI Joint Venture" for brevity) for the exclusive purpose of undertaking the project "Construction of Binalawan Concrete Buttress Dam and Appurtenant Facilities Contract No. SPISPI-C-3" awarded by the National Irrigation Administration (NIA); and that as provided in the joint venture agreement, the parties agree to contribute its resources on the basis of the following allocation: New Kanlaon Construction, Inc.-60% and J.E. Manalo & Co., Inc.-40%. In reply, please be informed that pursuant to Section 22 (B) of the Tax Code of 1997, as amended, the term "corporation" includes partnership, no matter how created or organized, joint stock companies, joint accounts (cuentas en participation) , association or insurance companies, but does not include 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. IHaCDE In BIR Ruling No. 274-92 dated September 30, 1992 issued to RMCC FEMCO Joint Venture, it was held that in undertaking general construction work for the rehabilitation of Calamba-San Pablo City road, the joint venture is exempt from the then 1% expanded withholding tax, to wit: ". . . In view thereof, it is our opinion that the joint venture of RMCC-FEMCO is not subject to the corporate income tax under Section 24 of the Tax Code. Consequently, gross payments received by said joint venture is not subject to the 1% expanded withholding prescribed by Section 50 (b) of the Tax Code, as amended and implemented by Revenue Regulations No. 6-85 as amended. However, the co-venturers are separately subject to the corporate income tax on their taxable income during each taxable year respectively derived by them from the aforesaid construction project . . . Moreover, as contractor, the joint venture RMCC-FEMCO shall be subject to the 10% value added tax pursuant to Section 102 (a) of the Tax Code , as amended by Executive Order No. 273." (emphasis supplied) Accordingly, the NKCI-JEMCI Joint Venture established for the purpose of undertaking the NIA's project named "Construction of Binalawan Concrete Buttress Dam and Appurtenant Facilities Contract No. SPISPI-C-3" is excluded from the aforequoted definition of taxable corporation, hence, not subject to the regular corporate income tax under Sections 22 (B) and 27 (A) of the Tax Code of 1997, as amended by R.A. 9337. Section 2.57 (B) of Revenue Regulations No. 2-98, as amended, provides for the withholding of creditable tax at source: "(B) Withholding of Creditable Tax at Source. The Secretary of Finance may, upon the recommendation of the Commissioner, require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year." This provision presupposes that the natural or juridical person is subject to income tax and thus, creditable tax shall be withheld by the payor-corporation on its income payments to said natural or juridical person. Since the joint venture is exempt from income tax, the gross payments of NIA to the joint venture shall not be subject to the 2% withholding tax prescribed under Section 57 (B) of the Tax Code of 1997, as amended by R.A. 9337, and as implemented by Revenue Regulations No. 2-98, as amended by Revenue Regulations Nos. 6-2001 and 12-2001. HaDEIc However, the co-venturers, New Kanlaon Construction, Inc. and J.E. Manalo & Co., Inc., are separately subject to the 32% (now 30%) corporate income tax imposed under Section 27 (A) of the Tax Code of 1997 effective January 1, 2000 on their taxable income derived from the aforesaid project. (BIR Ruling No. DA-015-01 dated February 12, 2001) Moreover, as a public works contractor, NKCI-JEMCI Joint Venture shall be subject to the 12% VAT as contractor pursuant to Section 108 (A) of the Tax Code of 1997, as amended by R.A. 9337. NKCI-JEMCI Joint Venture will only be required to file an annual information return in lieu of the quarterly and final adjustment/income tax returns, because under Sections 52 (A) and 76 both of the Tax Code of 1997, as amended by R.A. 9337, only corporations subject to tax are required to file said returns. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group