Philippine National Construction Corporation

May 2, 2007 BIR RULING [DA-282-07] 27 (C); RR 17-2003; DA-368-06 Philippine National Construction Corporation Epifanio de los Santos Avenue corner Reliance Street Mandaluyong City Attention: Ms. Maria Theresa T. Defensor President and CEO Manila North Toll Ways Corporation 2nd Flr., Benpres Building Stock Exchange Road corner Meralco Avenue Pasig City Attention: Mr. Rodrigo E. Franco Executive Vice-President, Chief Financial Officer and COO Gentlemen : This refers to your letter dated April 16, 2007, requesting for confirmation of your opinion that payments to Philippine National Construction Corporation ("PNCC") based on a percentage of the toll revenue of Manila North Tollways Corporation ("MNTC") from the North Luzon Expressway ("NLEX" or the "Project") are subject to the regular corporate income tax and to two percent (2%) creditable withholding tax. The facts as you represented, are as follows: The Philippine National Construction Corporation (PNCC), a government owned and controlled corporation, was granted the franchise to construct, operate and maintain toll road facilities for the North and South Luzon Expressways and the Metro Manila Expressways by virtue of Presidential Decree (P.D.) No. 1113 and its amendatory law P.D. No. 1894. The primary purpose of PNCC, as stated in its Articles of Incorporation, is as follows: "To carry on and conduct a general contracting business with any private person or government department, subdivision, instrumentality, office, institution or agency, including the designing, constructing, enlarging, repairing, remodeling, operation, maintenance, financing or otherwise engaging in any work upon buildings, roads, sidewalks, highways, bridges, dams, public markets, public improvements . . .; and to enter into and execute contracts or to receive assignments of contracts therefore or relating thereto; also to manufacture and/or furnish the building materials equipment supplies connected herewith; and to engage in any and all activities and business undertaking as may be necessary or incidental to accomplish the primary purpose and objectives of the Corporation that will contribute to the economic development of the Country." TIDHCc On August 29, 1995, in pursuance of its primary purpose, PNCC and First Philippine Infrastructure Development Corporation ("FPIDC") executed a Joint Venture Agreement ("JVA") for the joint undertaking of the completion, rehabilitation, refurbishing and modernization of the NLEX. Under the JVA, PNCC assigned its usufructuary rights, interests and privileges under its franchise in favor of the Joint Venture Company to be formed under the JVA, insofar as the funding, design, construction, rehabilitation, refurbishing and modernization of the Project are concerned. As a consideration for the said assignment, PNCC shall be paid based on a percentage of the toll revenues received from the NLEX. On February 4, 1997, MNTC was incorporated to serve as the Joint Venture Company that will undertake the execution of the Project. Subsequently, on April 30, 1998, MNTC was granted the concession to finance, design, rehabilitate, expand, operate and maintain the NLE under a Supplemental Toll Operation Agreement ("STOA") executed by and amongst MNTC, the PNCC, and the Republic of the Philippines acting through the Toll Regulatory Board ("TRB"). In reply, please be informed as follows: Section 27 (C) of the Tax Code of 1997 provides: "(C) Government-owned or Controlled Corporations, Agencies or Instrumentalities . The provision of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the government, except the Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO), and the Philippine Amusement and Gaming Corporation, shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in a similar business, industry or activity." In conjunction to the said provision, this Office is of the considered opinion that PNCC's share in the toll revenue collections on the Project is considered as its income subject to tax. On several occasions, the Bureau had consistently taken the position that income generated by a corporation in the active pursuit and performance of its primary purpose is ordinary business income subject to the regular corporate income tax. ( BIR Ruling No. 057-00 dated November 7, 2000; BIR Ruling No. DA 249-01 dated December 3 2001; BIR Ruling No. DA 187-02 dated October 16, 2002; BIR Ruling No. DA 351-03 dated October 10, 2003; BIR Ruling No. DA 116-06 dated March 16, 2006; BIR Ruling No. DA 368-06 dated June 13, 2006 ) We reiterated the same in the recent BIR ruling involving Verold Corporation. (BIR Ruling No. DA 369-06 dated June 15, 2006) As stated in the ruling, Verold Corporation is primarily engaged in wholesale/retail trade of a wide range of home appliances and office equipment. To properly merchant its products it entered into franchising agreement with various distributors. Thereafter, pursuant to its expansion program, Verold Corporation established Save on Surplus, Inc. and assigned its franchising business to the latter. In ruling on the nature of the royalty and franchise fees derived by the Verold Corporation and Save on Surplus, Inc. from the franchising agreements with the distributors, the BIR stated that: "[i]t is clear that the royalties and other fees received by VEROLD Corporation and Save on Surplus, Inc. are in the nature of ordinary business income because the aforesaid income was derived or generated from activities that are in accordance with the primary purpose of VEROLD Corporation and Save on Surplus, Inc. which is to engage in the wholesale and retail of office equipments as provided in its Articles of Incorporation ." (Emphasis Supplied) Based on the foregoing, PNCC's share in the toll revenues in return for the assignment of its rights under the franchise is service income derived in active pursuit of its business, hence subject to regular corporate income tax of 35% under Section 27 (C) of the National Internal Revenue Code of 1997, as amended by Republic Act No. 9337. It is worthy to note, however, that pursuant to its legislative franchise granted under PD 1113, as amended by PD 1894, PNCC is exempt from any present or future taxes in connection with the exercise of its right and privilege under the franchise and/or in connection with its activities pursued in accordance with the grant of its franchise, except for income tax and real property tax. The relevant provision of PD 1894 provides, as follows: "Section 14. The provisions of existing laws to the contrary notwithstanding, no tax, charges or fees of any kind, nature or description now or in the future imposed or levied by any municipal, city, provincial or national authority shall be imposed, levied or assessed on or be collected from the GRANTEE (referring to PNCC] in connection with its exercise of the right and privilege under this franchise and/or in connection with its activities pursued in accordance with and pursuant to this Decree, other than taxes on its income and real property in conformity with existing laws." Anent the matter of withholding, Section 2.57.2 (M) of RR No. 2.98, as amended by RR No. 17-2003 provides: "Sec. 2.57.2. Income payments subject to creditable withholding tax and rates prescribed thereon. Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines: xxx xxx xxx (M) Income payments made by the top ten thousand (10,000) private corporations to their local/resident supplier of goods and local/resident supplier of services other than those covered by other rates of withholding tax. Income payments made by any of the top ten thousand (10,000) private corporations, as determined by the Commissioner, to their local/resident supplier of goods and local/resident supplier of services , including non-resident alien engaged in trade or business in the Philippines aATEDS Supplier of goods One percent (1 %) Supplier of services Two percent (2%) Top ten thousand (10,000) private corporations shall include a corporate taxpayer who has been determined and notified by the Bureau of Internal Revenue (BIR) . . ." (Emphasis supplied) In view of all the foregoing, we confirm your opinion that payments to PNCC based on a percentage of the toll revenue of MNTC Corporation ("MNTC") from the NLEX are subject to the regular corporate income tax and to two percent (2%) creditable withholding tax, to be withheld by MNTC. Consequently, the amount of tax withheld shall be creditable against PNCC's income tax liability for the relevant taxable period. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service