BIR Ruling [DA-113-03]

April 8, 2003 BIR RULING [DA-113-03] Rev. Regulations No. 6-2001 237-90 dated December 19, 1990 Laya Mananghaya & Co. 22/F Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty. Remigio A. Noval Partner Atty. Ma. Georgina J. Soberano Principal Atty. Charlene O. Ang Senior Manager Gentlemen : This refers to your letter dated January 29, 2003 requesting on behalf of your client, Siemens Power Operations, Inc. (SPOI), for a ruling that payments made by First Gas Power Corporation (FGPC) to SPOI, as a general engineering contractor, under two (2) Operation and Maintenance Agreements (OMAs) are subject to 2% (formerly 1%) withholding tax prescribed under Section 2.57.2(E) of Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001. It is represented that SPOI is a corporation duly established and existing under the laws of the Philippines whose primary purpose is to engage in the operation, maintenance, service (including user-training) and repair of power plants for generation of electric power and to engage in the importation of raw material, components and spare parts for power plants; that on December 16, 1996 and April 15, 1999, SPOI and FGPC entered into two (2) separate OMAs for the operation and maintenance of the 1000 Megawatt (MW) and 500 MW combined-cycle gas fired power plants, respectively, for the production of electrical energy at FGPC's Batangas Power Station in Sta. Rita, Batangas; that both OMAs contain similar provisions and the services to be rendered by SPOI to FGPC under the OMAs generally include, but are not limited to: (a) Mobilization of competent and skilled staff to support the commissioning (bringing into service) of the plants and to put into place the infrastructure for the operation and maintenance activities; (b) To provide competent and skilled staff to take charge of the operation and maintenance of the blocks and the plants; (c) To operate the plants; (d) To maintain the plants, including repairs, in a manner such as to maximize the probability of meeting all efficiency, output, availability and starting reliability targets of the plants: and (e) To provide support during the plants transition phase to natural gas fuel operation. In reply thereto, please be informed that Section 3 of Revenue Regulations No. 6-2001, amending Section 2.57.2(E)(1) of Revenue Regulations No. 2-98 defines the term "General Engineering Contractor" as "(T)hose whose principal contracting business in connection with fixed works requiring specialized engineering knowledge and skill. Gross payments to such persons are subject to creditable withholding tax at the rate of 2% [formerly 1%]. A careful scrutiny of the above regulations disclosed that SPOI is indeed a general engineering contractor with respect to its activity of repairing the power plants, as its principal contracting business is to engage in the operation, maintenance, service (including user-training) and repair of power plants for generation of electric power and to engage in the importation of raw materials, components and spare parts for power plants. Similarly situated is BIR Ruling No. 237-90 dated December 19, 1990, where this Office ruled that ". . . gross payments made by PLDT to Nynex relative to the Project Engineering Support Services Contract as well as the Strategic Marketing Plan Services Contract shall be subject to the 1% . . . expanded withholding tax pursuant to Section 1(e)(1) . . . of Revenue Regulations No. 6-85, as amended otherwise known as the Revised and Consolidated Expanded Withholding Tax Regulations implementing Section 50(b) of the Tax Code, as amended." IN VIEW OF THE FOREGOING, this Office hereby holds that SPOI is a general engineering contractor. Accordingly, as a general engineering contractor, payments made by FGPC to SPOI are subject to a creditable withholding tax at the rate of 2% effective October 1, 2001 (formerly 1%), in accordance with Section 3 of Revenue Regulations No. 6-2001, amending Section 2.57.2 (E) of Revenue Regulations No. 2-98. 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. TEHIaD Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group