Tax Consequences of Joint-Venture Corporation, AC-PS, Inc.

August 9, 1996 BIR RULING NO. 092-96 24, 50 (b) 110 (c) 092-96 AC-PS, Inc. 105 Dela Rosa Street Makati City Attention: Mr . Fortunato Juan S . Zalamea Attorney-in-Fact, AC-PS, Inc Gentlemen : This refers to your letter dated July 4, 1994, requesting a ruling on whether: a) The joint-venture corporation, AC-PS, Inc. (AC-PS) is not subject to the 35% corporate tax prescribed under Section 24 of the Tax Code; cdpr b) The payments made by the Government of the Philippines/Bureau of Internal Revenue to AC-PS in connection with the Project are not subject to the 1% expanded withholding tax imposed on contractors of computer services and suppliers of goods to government offices under Section 1(e) 2(m) and Section 1(n) of Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 6-94; c) The AC-PS will only be required to file an annual information return in lieu of the quarterly and final adjusted income tax returns during its existence; d) AC-US and SUN, by being mere nominee shareholders of AC-PS and solidary obligors with ACI and AC-PS for the performance of the Contract and the liabilities thereon, are not deemed to be doing business in the Philippines and no permanent establishment is constituted for Philippine taxation purposes; e) The sale of goods and services to the Bureau which is passed through AC-PS is exempt from VAT; and f) The sale as a VAT-exempt transaction, of goods and services by AC-PS to the Bureau is not subject to the 3% and 6% creditable withholding VAT imposed under Republic Act No. 7649. Income Tax Status of AC-PS, Inc . Facts 1. AC-PS, Inc., a domestic corporation registered with the Securities and Exchange Commission, was organized and incorporated in pursuance to the terms and conditions of Clause 47. of Part and Clause 2.1 of Part B2 of the Invitation For Bid (IFB) for the Philippine Tax Computerization Project Bureau of Internal Revenue Component ("Project"), which requires the winning bidder-consortium to formalize, establish and register as a joint venture company. This requirement was satisfied after the winning bidder-consortium composed of Andersen Consulting, an Illinois partnership ("AC-US"); Andersen Consulting, Inc. a domestic corporation ("ACI"); Philippine Systems Products, Inc., a domestic corporation ("PSPI:); and Sun Microsystems Computer Corporation, A US corporation ("SUN"), registered with the Securities and Exchange Commission as a close corporation under the name AC-PS, Inc. ("AC-PS"), with paid-in authorized capital stock of Ten Thousand Pesos (P10,000.00) with ACI and PSPI, each owning legally and beneficially forty-eight percent (48%) of AC-PS, and AC-US and SUN each owning two percent (2%). 2. Forming part of this requirement is a stipulation taken up during the course of the bidding process and the Question and Answer Sessions held for the purpose, to the effect that the Bureau of Internal Revenue ("Bureau") accepts the fact its purpose is essentially to minimize mechanical difficulties in its task of maintaining the contract given the size and complexity of the Project, a relatively simple arrangement of dealing with a single entity for the execution of the Contract. 3. The Articles of Incorporation of AC-PS reflect the foregoing consideration, particularly on the terms and conditions of the IFB which requires the winning bidder-consortium to be incorporated. A close scrutiny of the corporate set-up of AC-PS reveals that it was incorporated as a close corporation with a limited paid-in authorized capital stock of Ten Thousand Pesos (P10,000.00) distributed among the consortium and no other properties of funds contributed to the corporation except for the paid-in amount contributed to meet the minimum capitalization requirement prescribed by law for incorporation. Among others its, primary purpose as enumerated in the incorporation papers are as follows: a. To serve as a liaison office and clearing for purely administrative purposes in connection with the supply of goods and services by the winning bidder-consortium; b. To simplify and facilitate the filing system and reporting requirements for the Project, and to ensure the convenient and expeditious handling of claims and settlements of accounts; c. To hold all funds and proceeds of any passed through the Corporation that may come into its possession for and on behalf of the individual member-suppliers and no part of the proceeds of such sale shall ensure to the benefit of the Corporation nor shall the same available for its use; it is primarily organized for the purpose of complying with the terms and conditions of the Contract for the Philippine Tax Computerization Project Bureau of Internal Component requiring the winning bidder-consortium for formalize, establish and register as a joint venture corporation and not formed for pecuniary of financial gain. Its formulation and incorporation was merely to satisfy the requirement of the Contract for the Philippine Tax Computerization Project. AC-PS will not derive revenues separately for its own behalf nor does it operate to generate any income, profit or gain. LLpr Ruling 1. Although as represented, AC-PS will not realize taxable income from the Contract/Project because: (a) it was organized merely as a "conduit" or Pass though" entity through which the billings and payments for goods and services supplied by the members of the joint venture are coursed , and (b) it operates on zero net revenue retention, the fact that it is duly registered with the Securities and Exchange Commission, it is considered as a corporation for income tax purposes under Section 24 of the Tax Code, as amended. Accordingly, AC-PS shall file a quarterly income tax return (BIR) Form 1702-Q) and an annual income tax return (BIR Form 1702) as prescribed by law. 2. Payments to be made by the BIR to the supplier through AC-PS for goods and services shall be subject to the creditable withholding tax of 1% pursuant to Section 1(e) 2(m) and Section 1(n) of Revenue Regulations No. 685 as amended by Revenue Regulations No. 12-94. The BIR shall issue a withholdings tax certificate (BIR Form 1743-1) to AC-PS for the account of the supplier indicated in the sales invoice, to be used by the latter as a tax credit against the income tax due. 3. With respect to consumables or "out-of-pocket" expenses as defined in its bid incurred by AC-PS which are chargeable to the Project and therefore reimbursable by BIR to AC-PS, payment therefor shall not be subject to the 1% creditable expanded withholdings tax. 4. AC-US and SUN, both foreign corporations, being mere nominee shareholders of AC-PS and solidary obligors ACI and PSPI, jointly and severally liable for the performance of the Contract, are not deemed doing business in the Philippines. Value-Added Tax Facts The transaction of AC-PS with the Bureau disclose that all products supplied by the members of the joint venture are passed by the former to the latter at no additional cost or mark-up. The entire proceeds of the sale are merely collected and held in trust by AC-PS for distributions to the supplier-members. AC-PS operates on a zero net revenues separately for its own behalf and does not operate to generate any income, profit or gain as gleaned from its transactions on hand and its corporate existence. It thus confirmed that all revenues received by the member-suppliers (ACI and PSPI) for passed on goods and services are declared in their respective income tax returns. Clause 13 Part B of the IFB requires that billings to the Bureau for the goods and services supplied should be made on the quoted prices provided in the financial bid, net of taxes and Sec. 8.6. of the Contract provides that payments for indirect taxes and import duties based on goods or services, including the local business tax, but not business permits or penalties, will be reimbursed by the Bureau against proof of payment , such reimbursement will be made within forty (40) days after submission of valid claims. To place things in their proper perspective, the transactional relationship between/among the members of the joint venture and AC-PS and other suppliers outside the joint venture is described below: For goods imported and supplied by PSPI PSPI imports goods (e.g. computer hardware) in the name of the Project/Bureau. Taxes due on the importation and accruing upon release of the goods from the Bureau of Customs, including the VAT, are paid by the BIR through Payment Compliance Certificate (PCC) with the taxes deemed as automatically appropriated as per Joint Circular 2-91 dated November 19, 1991. casia Example: Cost of goods imported by PSPI P400,000.00 10% VAT paid by the BIR thru PCC 40,000.00 Total Cost of Imported Good, VAT Included P440,000.00 =========== PSPI will "sell' the goods to BIR through AC-PS with additional mark-up. The cost of goods plus the mark up and 10% VAT will constitute the selling price of the goods. Example: Cost of imported goods, excluding VAT P400,000.00 Mark-up (assuming in this example) 100,000.00 Total Selling Price to AC-PS P500,000.00 10% VAT 50,000.00 Total Sales Price, including VAT P550,000.00 =========== AC-PS passes on the goods to BIR for the same amount P550,000.00, inclusive of the VAT billed as a separate item in the invoice. Clause 7.2 of the Contract between the BIR and AC-PS, Inc., regarding the Supply of Goods and Services for the Philippine Tax Computerization Project (hereinafter referred to as Contract) requires that "For Goods and Services, import duties and taxes must be itemized on invoices presented to the Bureau." In the above example, AC-PS will invoice the BIR as follows: Selling Price P500,000.00 10% VAT 50,000.00 Total Payable by the BIR to AC-PS P550,000.00 =========== BIR will then pay the above invoice as follows: From loan proceeds: Selling Price P500,000.00 Less Price 1% EWT 5,000.00 P495,000.00 From local funds: 10% VAT P50,000.00 Less: PCC for PSPI 40,000.00 P10,000.00 Cash Payable to PSPI thru AC-PS P505,000.00 ======== For locally-sourced goods or goods supplied by other suppliers through ACI or PSPI ACI or PSPI will sell the goods to BIR through AC-PS. The cost of the goods including the mark-up and the 10% VAT will be the final selling price (ESP) of the goods to be passed on by AC-PS to the BIR. Example: Total Selling Price to AC-PS P500,000.00 10% VAT 50,000.00 Total Selling Price to BIR, including VAT P550,000.00 BIR will pay the above invoices as follows: From loan proceeds (70%) and local funds (30%): Selling Price P500,000.00 Less 1% EWT 5,000.00 P495,000.00 VAT P50,000.00 Less: 3% VAT Withholding 15,000.00 P35,000.00 Cash Payable to Supplier thru AC-PS P35,000.00 ======== For Charges on Services by ACI ACI adds on 10% Vat on the cost of expatriate services and personnel support complement supplied to AC-PS which in turn will pass on the cost of the service charges of ACI, including the 10% tax, to the Bureau. The Bureau will pay AC-PS the amount resenting the cost for the services supplied by ACI plus the 10% VAT. The VAT will be reimbursed by the Bureau to AC-PS. prLL Example: Service Fee P500,000.00 10% VAT 50,000.00 Total Service Fee, including VAT P550,000.00 ========== BIR will pay the above invoice as follows: From loan proceeds: Services P500,000.00 Less 5% EWT 25,000.00 P475,000.00 From local funds: VAT P50,000.00 Less: 6% VAT Withholding 30,000.00 P20,000.00 Cash Payable to PSPI thru AC-PS P495,000.00 =========== Billings to the BIR for the goods and services supplied should be made on the quoted prices provided in the financial bid, net of taxes (Clause 13 Part B of the IFB) and payments for indirect taxes and import duties based on goods or services, including the local business tax, but not business permits or penalties, will be reimbursed by the Bureau against proof of payment (Section 8.6, Special Conditions of Contract). These requirements presuppose that all indirect taxes and import duties on the goods or services, including local business tax, shall be reimbursed by the Bureau upon payment thereof as evidenced by the invoice of AC or PSPI to AC-PS. 1. For imported goods supplied by AC-PS thru PSPI, considering: (a) that a substantial amount of the VAT (as shown in the above illustration) represented 80% of the total VAT due on the final transaction is paid by the BIR thru PCC, and (b) that such payments is already in excess of the amount of 3% withholding tax required to be withheld under Revenue Regulations No. 1293, there is no need for the BIR to withhold VAT on the payments to be made to AC-PS. 2. With respect to locally sourced goods or goods supplied by other suppliers through AC-PS or PSPI, and for charges on services by ACI, they shall be subject to 1% or 5% expanded withholding tax and 3% or 6% VAT, respectively, and the withholding tax certificate for the purpose will be issued by the BIR in the name AC-PS for the account of ACI, PSPI or other suppliers as the case may be. 3. The cost of consumables reimbursable by the BIR to AC-PS shall not be subject to withholding for VAT purposes. 4. As a joint venture, AC-PS is required to register as a VAT taxpayer. Although AC-PS represents that it is not actually and directly engaged in the sale of goods (goods imported or goods supplied by PSPI/ locally sourced goods or goods supplied by other suppliers) and services (charges on services by ACI), AC-PS should register as a VAT taxpayer considering that it is the entity which invoices its client the BIR for the cost of goods sold and services supplied. We trust that the above information has provided an adequate response to your queries. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue