BIR Ruling [DA-218-05]

May 4, 2005 BIR RULING [DA-218-05] R.R. 30-2003; 006-2003 Saulog and De Leon Law Offices Unit 2101 Pearlbank Centre 146 Valero Street, Salcedo Village Makati City Attention: Mr. Digno L. Camacho, Jr. Gentlemen : This refers to your letter dated March 16, 2005 requesting for a ruling in behalf of your clients, Global Mobile Enterprise Corporation (GME) and GME Advanced Telecommunication Solutions Corporation (GME ATS),on the following issues: 1. Whether the services performed for Alcatel Philippines, Inc. (Alcatel) by employees of GME ATS (formerly under contract with GME) are those of specialty contractors or management and technical consultants? 2. Whether GME ATS (and GME) is subject to a 2% or 15% withholding tax rate? It is represented that an agreement was forged between GME ATS (formerly under contract with GME) and Alcatel entitled "Services Contract for Contract Engineering Services Provided to Alcatel Philippines, Incorporated";that Alcatel engaged GME ATS and GME's services to provide specific project and engineering resources to form part of a project team rendering general scientific, engineering, technical and technological services in furtherance of construction projects, including, but not limited to, the construction of a mobile telecommunications network; that the employees of GME ATS and GME rendered services for Alcatel as Project Manager, Deputy Regional Project Manager, Site Engineering and Documentation Manager and Supply Chain Manager; that they agreed to perform the following responsibilities: 1. Supply Chain Manager Planning a. Global project procurement plan (equipment and resources) b. Notice of intended delivery c. Overall follow-up from procurement dispatch Procurement a. collection of project needs b. selection and qualification of suppliers c. trigger and follow-up project PO Incoming Logistics a. international transport coordination b. local transport to warehouse c. NTC permits d. Spare parts return and repair e. Customs clearance Warehousing and Dispatch a. project stock inventory (data base) b. warehouse management c. damage reports d. equipment dispatch to site (including transportation management) 2. Regional Project Manager Regional Operations a. RNE b. Engineering c. Site acquisition d. Site implementation e. Cost control f. Data entry and reporting g. Quality 3. Site Engineering and Documentation Manager a. site engineering and design specification with customers and subcontractors b. contractual compliance c. suppliers and subcontractor performance measurement and audit d. validation of site BoQ e. monitoring of overall site engineering quality f. site engineering documentation management that Alcatel considers GME ATS/GMEC's employees to be technical and management consultants, hence subject to the creditable withholding tax of 15% pursuant to Section 3(B) of Revenue Regulations No. 30-2003; that it is your position that said services fall within Section 4(E)(1) or 4(E)(3) of Revenue Regulation 30-2003 hence subject to only 2% creditable withholding tax on the ground that the services being rendered by the employees are those by general engineering contractors. In reply, please be informed that Section 4 of Revenue Regulations No. 30-2003, amending Revenue Regulations No. 2-98, as amended, defines the term "Specialty Contractor" as "(T)hose whose operations pertain to the performance of construction work requiring special skill and whose principal contracting business involves the use of specialized building trades or crafts." Gross payments to such persons are subject to creditable withholding tax at the rate of 2% (formerly 1%). In the case of Commissioner of Internal Revenue vs. The Court of Tax Appeals and Avecilla Building Corporation ,143 SCRA 49 (1985),the Supreme Court ruled that a domestic corporation authorized to render "general scientific, engineering and technological services in all the various branches thereof including but not limited to evaluation, appraisal, market studies, project reports, management, consultation, construction supervision, training and/or engagement in any work or plan," is considered a specialty contractor under then Section 191 of the Tax Code, which lists the persons subject to the then contractor's tax. The aforementioned decision quoted the case of Hon. Efren I. Plana, in his capacity as Commissioner of Internal Revenue, petitioner, vs. Court of Tax Appeals and Engineering Development Corporation of the Philippines ,G.R. No. L-52018, February 23, 1990. DCTHaS Accordingly, GME and GME ATS, as a specialty contractors, the professional fees that they receive for their services rendered to Alcatel 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 Regulation No. 30-2003 amending Section 2.57.2(E)(3) of Revenue Regulations No. 2-98 as amended. (BIR Ruling No. 006-2003 dated August 15, 2003) 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, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group