BIR Ruling [DA-380-04]

July 7, 2004 BIR RULING [DA-380-04] RR 6-2001; 006-03 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. Romulo S. Danao, Jr. Partner, Tax Services Gentlemen : This refers to your letter dated April 20, 2004 requesting for a confirmation of your opinion that the professional fees that Design Coordinates, Inc. (DCI) receives from its clients are subject to the creditable withholding tax rate of two percent (2%) pursuant to Section 2.57.2(E)(3) of Revenue Regulations No. 2-98 (Withholding Tax Regulations), as amended by Section 3 of Revenue Regulations No. 6-2001. It is represented that DCI is a corporation organized and existing under the laws of the Philippines, with office address at Suite 202, 337 Gil Puyat Avenue, Makati City; that as construction project specialists; it provides general and specific administration and supervision over the pre-construction, construction and post-construction stages of its clients' various projects; that as stated in its Articles of Incorporation, its primary purpose is "to engage in and carry on a general construction business and in connection thereto, to hire the services of duly qualified engineers, architects and other professionals, to do designing, redesigning, preparation of estimates, surveys, planning, consulting, consultation, inspection, testing, appraising, and certifying of machines and materials of whatever nature, recruiting and supervision of construction, maintenance and repairs, supervision of building and construction, constructing, repairing or engaging in any work upon buildings, facilities and structure of all kinds. . . "; that DCI undertakes activities that require the use of special skills and it is a general contracting business that uses specialized building trades and crafts; and that in light of the above services it provides, it is your position that DCI can be properly classified as a specialty contractor; hence, for purposes of creditable withholding tax, the professional fees DCI receives from such services may be subject to creditable withholding tax at the rate of two percent (2%) under Section 2.57.2(E)(3) of Revenue Regulations No. 2-98, as amended. In reply thereto, please be informed that Section 3 of Revenue Regulations No. 6-2001, amending Section 2.57.2(E)(3) of Revenue Regulations No. 2-98, 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%. In BIR Ruling No. 006-03 dated August 15, 2003, this office ruled that for purposes of withholding tax, Davis Langdon and Seah Philippines, Inc. ("DLS"), an independent firm of quantity surveyors, cost engineers and construction cost specialists, is considered a specialty contractor. DLS renders quantity surveying services in building and other civil works projects including, but not limited to, initial design, tendering procedures and contract arrangements, cost studies and planning, master development programming, tender contract analysis and report, construction progress financial statement preparation, advisory contract administration, valuation of construction work in progress; and cost and material supervision in each and every work phase of construction, which services pertain to the performance of construction work requiring special skill. Notwithstanding the fact that DLS does not perform actual construction work, DLS is considered a specialty contractor, because its principal contracting business involves the use of specialized building trades or crafts. Accordingly, said ruling states that "as a specialty contractor, the professional fees that DLS receives for quantity surveying services are subject to 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." The same ruling likewise cited the case of Commissioner of Internal Revenue vs. The Court of Tax Appeals and Avecilla Building Corporation , 134 SCRA 49 (1985), wherein 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 also 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, which considers a corporation engaged in providing "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" a specialty contractor. The Court stated that "it does not matter if no actual construction work was performed; what is important and determinative is that [the company] sold services, the exercise of which activity is a privilege taxable under the law." Based on the foregoing, this Office hereby confirms your opinion that DCI is a specialty contractor. Accordingly, the professional fees that DCI receives as construction project specialists are subject to creditable withholding tax at the rate of 2% 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. TEIHDa Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group