BIR Ruling [DA-285-05]

June 23, 2005 BIR RULING [DA-285-05] RR 6-2001; 237-90; DA-113-2003; DA-380-2004 Medina & Partners Lawyers 11th Floor, East Tower, Philippine Stock Exchange Centre Exchange Road, Ortigas Business Center Pasig City Attention: Atty. Jose Gerardo A. Medina Partner Atty. Ian Ray P. Malilong Associate Gentlemen : This refers to your letter dated May 24, 2005 requesting on behalf of your client, Electrowatt-Ekono (Philippines), Inc., (EEPH), a ruling that payments made by CIP II Power Corporation, FR Cement Corporation, Nestle Corporation and Bataan 2020, Inc., as a general engineering contractor, under four (4) Operation and Maintenance Agreements (OMAs) are subject to two percent (2%) creditable withholding tax prescribed under Section 2.57.2(E) of Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001 dated July 31, 2001. It is represented that EEPH is a corporation duly established and existing under the laws of the Philippines whose primary purpose is to engage in the operation, maintenance, service, repair and rehabilitation of power plants; that on December 2000, September 2002, April 2003 and December 2004, EEPH entered into four (4) OMAs with CIP II Power Corporation, FR Cement Corporation, Nestle Corporation and Bataan 2020 Inc., respectively; that the OMAs essentially contained similar provisions for the operation and maintenance of power plants and related facilities and equipment which are located in Quezon City, Laguna and Rizal; and that under the OMAs, the services to be rendered by EEPH for its clients generally include, but are not limited to the following: 1. Mobilization of technically competent and skilled personnel to support the commissioning of the power plants and providing for the proper infrastructure for the full operation and maintenance of the power plants; 2. Operation of the power plants; and, 3. Maintenance of the power plants to ensure maximum efficiency in accordance with good technical and economic industry practices. In reply, please be informed that Section 2.57.2(E)(1) of Revenue Regulations (RR) No. 2-98, as amended by Section 3(E)(1) of RR No. 6-2001, as further amended by RR No. 12-2001 and RR No. 17-2003, and as last amended by RR No. 30-2003 defines the term "General Engineering Contractors" as "those 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 two percent (2%). In applying the provisions of the aforementioned Withholding Tax Regulations, it is clear that EEPH is indeed a general engineering contractor with respect to its activities relative to the operation and maintenance of power plants, since its principal contracting business is to engage in the operation, maintenance and repair of power plants for generation of electric power. DTAIaH In a similar view is BIR Ruling No. DA-113-03 dated April 8, 2003 whereby this Office held that: "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%." 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. . . . 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." IN VIEW OF THE FOREGOING, this Office hereby holds that EEPH is a general engineering contractor. Accordingly, payments made by CIP II Power Corporation, FR Cement Corporation, Nestle Corporation and Bataan 2020 Inc., to EEPH are subject to a creditable withholding tax at the rate of 2% effective October 1, 2001 (formerly 1%), in accordance with Section 3 of RR No. 6-2001, as last amended by RR 30-2003, amending Section 2.57.2 (E) of Revenue Regulations No. 2-98. Likewise, similar OMAs which EEPH may enter in the future which would contain the same provisions as above stated, shall be subject to the same rate of two percent (2%) creditable withholding tax or the rate prevailing at the time of Agreement. 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