Salvador Guevara & Associates

May 14, 2008 BIR RULING [DA-288-08] Rev. Regs. 2-98; DA-285-05 Salvador Guevara & Associates 815-816, Tower 1 & Exchange Plaza, Ayala Triangle Ayala Avenue, 1226 Makati City Attention: Attys. Maria Rosario L. Bernardo & Martin Ignacio D. Mijares Gentlemen : This refers to your letter dated February 29, 2008 requesting on behalf of your client, Covanta Philippines Operating, Inc. ("CPOI") for confirmation of your opinion that payments to CPOI for the operation and maintenance of power plants are subject to the two percent (2%) creditable withholding tax. As represented, CPOI is a resident foreign corporation organized and existing under the laws of Cayman Islands and authorized by the Securities and Exchange Commission ("SEC") to establish a branch office the Philippines to engage in the operation and maintenance of power plants. Presently, CPOI is the operator of the 440MW net coal-fired power electrical generating facility located in Mauban, Quezon, owned by Quezon Power (Philippines), Limited Co. ("QPL"), a Philippine limited partnership. Under the Plant Operation and Maintenance Agreement ("Q & M Agreement") with QPL, CPOI handles the operation and maintenance of QPL's power plant. In return, QPL pays CPOI reimbursable costs and operator's fees. The pertinent provision of the Q & M Agreement provides as follows: Article 3 Operator's Responsibilities 3. Operator's Responsibilities AEDHST 3.1 Generally 3.1.1 At the times set forth herein, Operator shall be responsible for all aspects of Plant operation and maintenance as described herein. 3.1.2 Operator shall prepare and provide to Owner an Operations and Maintenance Manual, substantially in the form of Exhibit 2, at least ninety (90) Days in advance of the anticipated Provisional Acceptance date, and update the Manual as appropriate from time to time. 3.1.3 Operator shall operate and maintain the Plant from and after the Turnover Date, and perform all Services, in accordance with (i) Standard Industry Practice, (ii) the Operations and Maintenance Manual, (iii) the Governmental Rules as provided in Exhibit 5, (iv) security requirements as agreed by Owner and Operator and (v) obligations relating to operations arising under the Project Documents or financing Documents, except such obligations as are to be performed by Owner pursuant to Section 2.16. TAaEIc 3.1.4 Not less than twelve (12) months prior to the anticipated commencement of the Mobilization Phase, Operator shall notify Owner in writing of its designation of an individual to act as its representative with respect to any matters which may arise during the performance of the Services. At any time, after the initial designation by Operator of its representative, Operator may designate a successor representative by similar written notice to Owner, which designation shall become effective immediately upon receipt of such notice or as otherwise designated therein. Operator's representative shall subject to Owner's prior approval, such approval not to be unreasonably delayed or withheld. 3.1.5 Operator shall review plans, specifications and other information developed pursuant to the Construction Contract, in accordance with procedures and schedules to be developed by Owner and Operator, and determine whether the Plant design would support Plant performance as contemplated by this Agreement and whether the design would adversely affect Operator's ability to discharge its obligations arising under this Agreement. Operator shall report promptly to Owner whether any aspect of the design would have an adverse effect on Operator's satisfaction of obligations arising under this Agreement, in which event Operator shall provide reasonable detail with respect to any adverse effect so identified. Such review, reporting, determination and supervision shall not, however, (i) constitute a waiver of any of Operator's rights hereunder, or (ii) render Operator responsible for any acts, omissions or faults of Contractor. In reply, please be informed that in BIR Ruling No. DA-285-05 dated June 23, 2005, which is similar to your case, this Office had occasion to rule as follows: aSDHCT ". . . 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 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." In a similar view is BIR Ruling No. DA-113-03 dated April 8, 2003 whereby this Office held that: 'xxx xxx xxx A careful scrutiny of the above regulations disclosed that SPO1 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.' xxx xxx xxx" In view of the foregoing, this Office hereby confirms your opinion that CPOI is a general engineering contractor. Accordingly, the payments to CPOI for the operation and maintenance of power plants are subject to two percent (2%) creditable withholding tax prescribed under Section 2.57.2 (E) of Rev. Regs. No. 2-98, as amended. 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 as null and void. THEDCA Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service