Joint Venture between Belgian Consortium and Construction Development Corp. of the Philippines Exempt from Income Tax

July 17, 1986 BIR RULING NO. 115-86 24 000-00 115-86 Gentlemen : This refers to your letter dated February 5, 1986 requesting a ruling as to whether the leadership fee as well as the service fee to be remitted by the Philippine National Construction Corporation (PNCC) to Belgian Consortium (BC) are exempt from tax. It appears from the facts represented in your letter and its enclosures, that the Philippine government was considering the construction of a Light Rail Transit System (LRT System) in Manila; that the Philippine government, as owner issued on March 24, 1979, a call for bids relative to the rolling stock, tracks, certain electrical and mechanical equipment to spare parts and to technical assistance of the owner; that as a result of said call for bids, BC consisting of the following Belgian companies; Ateliers de Constructions Electriques de Charleroi S.A., Chuissee de Charleroi, 54,1000 Brussels; Constructions Ferroviaires et Metalliques, BN S.A., Rue de La Loi, 74,1040 Brussels; Transurb Consult, rue de Louvain, 17,100 Brussels; Tractionel Engineering International S.A. rue de Arlon 88,1040 Brussels was formed to submit a bid and was designated as having the first priority to negotiate with the Government for award of the Contract; that the Construction Development Corporation of the Philippines (CDCP now PNCC), was designated as Contractor for civil works portion of the LRT System; that, consequently BC and CDCP decided to join their skills and efforts to negotiate a contract in pursuance of the wish of the Government and, in case of award, to implement the construction of the LRT System. In consideration of the foregoing, BC on one part, and CDCP, on the other part, agreed to set up an Association governed by an Agreement executed by them on February 11, 1980, the purpose of which is to prepare the contract for the LRT System in agreement with the Owner, the negotiation, execution and implementation of the Contract between the owner and the Association; that said agreement apportioned the scope of work to be executed by BC and PNCC, that BC shall undertake the conceptual design of the system, detailed design of the equipment to be supplied by it, design of the track as well as the supply of electromechanical components therefore; that PNCC shall undertake the detailed engineering and architectural design of all civil works of the LRT System; that the agreement has designated BC as the leader of the Association; that as compensation to BC as leader of the Association and for services rendered to PNCC during the construction of the LRT System, PNCC has agreed to pay BC a leadership fee of One Million U.S. Dollars (US$1,000,000.00); and that service fees for the supply of specialists and experts by BC during the period of construction are billed by BC to PNCC separately. To implement the aforesaid Agreement, a contract was entered into on July 11, 1980 by and between the Philippine government, as owner, and above-named Belgian companies referred to collectively as Belgian Consortium (BC) in joint venture with CDCP. BC and CDCP are referred to in the contract as the CONTRACTOR. You have also informed this Office that you have made several peso payments to BC in respect of the leadership fee; that no taxes have been withheld from said payment since you were of the view that BC, being a party to a joint venture formed for the purpose of undertaking a construction project for the Philippine government is exempt from tax; and that you are now preparing to remit to BC the balance of the leadership fee and the outstanding service fees for BC experts and specialist whose expertise were engaged in the final phase of the LRT Consortium. In reply, I have the honor to inform you that the joint venture entered into by and between the BC and CDCP for the purpose of undertaking a construction project, i.e., the LRT System is exempt from income tax, pursuant to Sections 20(b) and 24, both of the Tax Code. Likewise, BC having been formed by Belgian Companies to undertake portions of the said construction project is exempt from income tax under the same provisions of the Tax Code. Such being the case, the leadership fee being paid by CDCP (now PNCC) to the BC is not subject to Philippine income tax. For the same reason, gross payments either to the joint venture of BC and CDCP or to BC are not subject to the expanded withholding tax law prescribed by Section 51 of the Tax Code, as amended by P.D. No. 1351 and its implementing regulations. However, the Contractor which consisted the joint venture between BC and CDCP is subject to the fixed and percentage taxes as independent Contractor under Sections 192(1) and 205(16) (now Sections 161 and 170) both of the Tax Code. It is also understood that CDCP (now PNCC) is liable for the payment of the corporate income tax on the income derived by it on the above construction project. This ruling is subject to verification and the same will be revoked if after verification, the facts are not as represented. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner