BIR Ruling No. 176-14

June 9, 2014 BIR RULING NO. 176-14 Sec. 22 (B) NIRC; RR 14-02; RR 10-12; BIR Ruling No. 072-10 R.D. Policarpio and Co., Inc./Sunwest Construction and Dev't. Corp. (JV) 544 Melania St., Samsonville Subd., Dau, Mabalacat Pampanga 2010 Attention: Mr. Noelito D. Policarpio Gentlemen : This refers to your letter dated December 16, 2013 which was indorsed by Revenue Region No. 4, City of San Fernando, Pampanga on January 13, 2014, requesting for a ruling that the joint venture between R.D. Policarpio and Co., Inc. ("R.D. Policarpio") and Sunwest Construction and Development Corporation ("Sunwest") for the purpose of pre-qualifying and undertaking the construction for the Contract Package I-Luzon Lot 1.2, Olongapo-Bugallon Road Province of Zambales and Pangasinan under Asset Preservation Component Road Improvement and Institutional Development Project (RIIDP) is exempt from the two (2%) percent creditable withholding tax pursuant to Revenue Regulations (RR) No. 014-02. Documents submitted disclosed that R.D. Policarpio & Co., Inc./Sunwest Construction & Development Corporation Joint Venture ("JV"), with TIN No. 439-378-546-000, is an unincorporated joint venture formed to undertake the pre-qualification and construction of Contract Package I-Luzon Lot 1.2, Olongapo-Bugallon Road Province of Zambales and Pangasinan under Asset Preservation Component Road Improvement and Institutional Development Project (RIIDP); that the JV is also registered with the Philippine Contractors Accreditation Board (PCAB) with Special Contractor's License No. SL2-SN-001538 issued on February 14, 2014; that on the other hand, R.D. Policarpio & Co., Inc. is registered with the BIR with TIN No. 000-266-395 and is engaged in the business of building of constructions or parts and civil engineering; that it is also registered with the PCAB with Contractor's License No. 4414 first issued on August 10, 1978; that Sunwest Construction and Development Corporation is likewise registered with the BIR with TIN No. 005-713-538 and is engaged in the business of building of constructions or parts and civil engineering; that it is also registered with the PCAB with Contractor's License No. 15906 first issued on November 26, 1992; that the JV entered into a contract with the Department of Public Works and Highways (DPWH) for the construction and completion of the afore-mentioned RIIDP project; and that the herein co-venturers have mutually agreed to contribute to the joint venture, all the necessary capital equipment, technical personnel, management supervision, and other efforts and resources for the proper implementation of the project and to extend to each other their respective fullest cooperation towards profitable construction of the project in accordance with approved plans and specifications to complete the same based on the approved work schedule; and that the co-venturers agreed that their respective proportionate share in the profits and losses of the Joint Venture shall be 55% for R.D. Policarpio & Co., Inc. and 45% for Sunwest Construction & Development Corporation. DEScaT In reply, please be informed that pursuant to Section 22 (B) of the Tax Code of 1997, as amended, the term "corporation" shall include partnerships, 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. Likewise, Section 4 (B) (5) of Revenue Regulations (RR) No. 14-2002 dated September 9, 2002 provides that the withholding of creditable withholding tax (CWT) shall not apply to income payments made to joint ventures or construction formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal & other energy operations pursuant to an operating or consortium agreement under a service contract with the government. Furthermore, Section 3 of RR No. 10-2012 dated June 1, 2012 provides, to wit: "SEC. 3. Joint Ventures Not Taxable as Corporations . A joint venture or consortium formed for the purpose of undertaking construction projects which is not considered as corporation under Section 22 of the NIRC of 1997 as amended, should be: (1) for the undertaking of a construction project; and (2) should involve joining or pooling of resources by licensed local contractors; that is, licensed as general contractor by the Philippine Contractors Accreditation Board (PCAB) of the Department of Trade and Industry (DTI); (3) the local contractors are engaged in construction business; and AHTICD (4) the Joint Venture itself must likewise be duly licensed as such by the Philippine Contractors Accreditation Board (PCAB) of the Department of Trade and Industry (DTI). Joint ventures involving foreign contractors may also be treated as a non-taxable corporation only if the member foreign contractor is covered by a special license as contractor by the Philippine Contractors Accreditation Board (PCAB) of the Department of Trade and Industry (DTI); and the construction project is certified by the appropriate Tendering Agency (government office) that the project is a foreign financed/internationally-funded project and that international bidding is allowed under the Bilateral Agreement entered into by and between the Philippine Government and the foreign/international financing institution pursuant to the implementing rules and regulations of Republic Act No. 4566 otherwise known as Contractor's License Law. Absent any one of the aforesaid requirements, the joint venture or consortium formed for the purpose of undertaking construction projects shall be considered as taxable corporations. In addition, the tax-exempt joint venture or consortium as herein defined shall not include those who are mere suppliers of goods, services or capital to a construction project. The members to a Joint Venture not taxable as corporation shall each be responsible in reporting and paying appropriate income taxes on their respective share to the joint ventures profit." AHEDaI Such being the case, R.D. Policarpio & Co., Inc./Sunwest Construction & Development Corporation Joint Venture formed for the purpose of construction of Contract Package I-Luzon Lot 1.2, Olongapo-Bugallon Road Province of Zambales and Pangasinan under Asset Preservation Component Road Improvement and Institutional Development Project (RIIDP) with the DPWH is considered as a joint venture not taxable as a corporation for complying with the conditions provided in RR 10-2012, i.e., (1) the JV is for the undertaking of construction project; (2) the JV should involve joining or pooling of resources by licensed local contractors (licensed as general contractor by the (PCAB); (3) the local contractors are engaged in construction business; and (4) the JV itself must likewise be duly licensed by PCAB ; and therefore not subject to the corporate income tax under Section 27 (A) of the Tax Code of 1997, as amended. Furthermore, the gross corporate payments to the joint venture are not likewise subject to the 2% creditable withholding tax prescribed under Section 57 (B) of the same Code, as implemented by RR 2-98, as amended by RR No. 14-2002. (Section 4 (B) (5) of RR No. 14-2002 dated September 9, 2002) The herein joint venture being exempt from corporate income tax is not required to file quarterly and final adjustment returns. However, the co-venturers are separately subject to the regular corporate income tax imposed under Section 27 (A) of the Tax Code of 1997, as amended, on their taxable income during each taxable year respectively derived by them from the aforesaid construction project. (BIR Ruling No. 072-10 dated September 15, 2010) It should be emphasized that the respective net income of the co-venturers derived from the joint venture project is subject to the creditable withholding tax imposed under Section 57 of the Tax Code of 1997, as amended, and implemented by RR 2-98, as amended. Thus, before R.D. Policarpio & Co., Inc./Sunwest Construction & Development Corporation Joint Venture distributes the net income of the co-venturers, pursuant to their agreed profits/income sharing, it shall withhold the tax based on the net income of its co-venturers. IATHaS Finally, the co-venturers are required to enroll themselves to the Bureau of Internal Revenue's Electronic Filing and Payment System (EFPS). The enrollment should be done at the Revenue District Office (RDO) where they are registered as taxpayers. (Section 4 of RR No. 10-2012) 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 null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue