Taxing joint ventures

Let’s Talk Tax
Oliver Gil M. Beltran

Posted on June 26, 2012

The lifeblood doctrine provides that since taxes are what we pay for civilized society -- in other words, the lifeblood of the nation -- statutes granting tax exemptions are construed strictissimi juris -- i.e., against the taxpayer and liberally in favor of the taxing authority.

Taxation is the rule and exemption therefrom is the exception, so to speak.

Sec. 22 (B) of the National Internal Revenue Code of 1997 (NIRC), joint ventures formed for the purpose of undertaking construction projects are specifically excluded from the coverage of taxable corporations, which may be subject to corporate income tax under Section 27(A) thereof.

In this regard, the Bureau of Internal Revenue (BIR) has previously issued a number of rulings confirming the above mentioned exemption of joint ventures (JVs) for construction projects from payment of corporate income tax.

Nonetheless, with the perceived effort to address issues surrounding such exemption given to JVs or consortium, the Office of the Commissioner has recently issued Revenue Regulations No. (RR) 10-2012. The exemption of joint ventures for construction projects was legislated pursuant to Presidential Decree No. 929, assisting local contractors in attaining competitiveness vis-a-vis their foreign counterparts.

Under Sec. 3 of RR 10-2012, a joint venture or consortium formed for the purpose of undertaking construction projects shall not be considered as a taxable corporation under Sec. 22 of the NIRC as amended, so long as such joint venture satisfies the following requisites:

(1) it is for the undertaking of a construction project;

(2) it involves joining or pooling of resources by licensed local contracts -- i.e., licensed as general contractor by the Philippine Contractors Accreditation Board (PCAB) of the Department of Trade and Industry (DTI);

(3) its local contractors are engaged in construction business;

(4) it is duly licensed as such by the PCAB of the DTI;

Under RR 10-2012, the BIR has now limited the scope and coverage of tax exemptions to those joint ventures formed by local general contractors licensed by the PCAB, and whose general contractors are also engaged in the construction business. In addition, it is also imperative for a joint venture to be licensed by the PCAB.

As an exception to the foregoing, RR 10-2012 also grants tax exemption to foreign contractors as long as the following requirements are satisfied:

(1) the member foreign contractor is covered by a special license as contractor by the PCAB; and

(2) 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.

Nonetheless, although the income of the aforementioned joint ventures is exempted from the payment of income tax, members of a joint venture shall be responsible for the reporting and the payment of the appropriate income taxes on their respective shares in the joint venture profit.

It can be noted that a significant number of joint ventures granted the tax-exempt status pursuant to BIR Rulings were actually between general contractors and capital contributors, such as landowners. With the above definition, it would appear that these aforementioned joint ventures are not covered under RR 10-2012. This is also in consonance with the provision of RR 10-2012 that specifically provides that the tax exemption granted to joint ventures and consortium shall not include the mere suppliers of goods, services or capital to a construction project.

Although the apparent intention of the BIR in the issuance of RR 10-2012 is only to redefine the term joint venture in reference to the tax exemption accorded to it under the Tax Code of 1997, it seems that RR 10-2012 has ruffled a number of contentious issues that must be further addressed and clarified by the BIR. For example, what happens when a particular joint venture is declared to be taxable for failure to satisfy any of the above mentioned requirements? Will such joint venture be considered as partnership although the same is formed only for the execution of a single undertaking, hence temporary in character? Will the joint venture be required to register as corporate taxpayer considering its temporary existence?

Contractors and investors are also apprehensive of the fact that joint ventures not qualified for exemption are taxed twice -- the income of a joint venture itself is subject to the regular corporate income tax and the respective income derived by the members of the joint venture is further subjected to income tax. It does not end there. What about the respective share received by the members of the joint venture at the end of its existence? Are these to be considered as mere return of capital or liquidating dividends?

It is also noteworthy that Sec. 5 of RR 10-2012 modifies, amends, and revokes all existing rules and regulations and BIR issuances that are inconsistent with its provisions. On the other hand, Sec. 6 provides that RR 10-2012 shall take effect 15 days after its publication.

In this regard, since the repealing clause of RR 10-2012 is absolute and signifies retroactive application thereof, it applies even to transactions that are already in effect even prior to the effectivity of RR 10-2012. As such, joint ventures previously enjoying tax exemption shall lose this benefit should they fail to meet any of the requirements set under the law. However, this begs the question of whether the aforementioned disqualified joint ventures shall be given the chance to subsequently rectify any deficiency so as to continuously enjoy exemption from payment of corporate income tax.

With the ensuing ruckus to the property and construction industries because of RR 10-2012, it will really be very helpful to the taxpayers involved if the BIR would further cause the release of an issuance addressing and/or explaining the effects of RR 10-2012.

(The author is a tax manager with Punongbayan & Araullo’s (P&A) Tax Advisory and Compliance Division. P&A is a leading accounting, auditing and advisory services firm and is the Philippine member of Grant Thornton International Ltd. For comments and inquiries, please e-mail or call 886-5511).