BIR Ruling [DA-439-05]

October 24, 2005 BIR RULING [DA-439-05] SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. Rafael C. Vinzon Partner, Tax Services Gentlemen : This refers to your letter dated July 5, 2005 requesting for a confirmation of your opinion that the professional fees received by DCCD Engineering your Corporation (DCCD for brevity) 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, as amended by Section 3 of Revenue Regulations No. 6-2001. It is represented that DCCD is a domestic corporation duly organized and existing under Philippine laws with office address at Sol Building, 122 Amorsolo Street, Legaspi Village, Makati City; that it is primarily engaged in the business of providing technical consultancy for the construction, repair, alteration, restoration, development, management, supervision, and special studies of any technical work, plan or project; that in pursuit of its business, DCCD employs the services of engineers, architects, surveyors, and other professional and technical men to prepare plans, designs, estimates and surveys, and perform testing, inspection, appraising and certifying of machines, and supervise the construction, maintenance and repairs of building, facilities and other related structures; that DCCD undertakes activities that require the use of special skills and it uses specialized trades and crafts to promote its business; and that in the light of the above services it provides, it is your position that DCCD can be properly classified as a specialty contractor; hence, for purposes of creditable withholding tax, the professional fees that DCCD 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 by Section 3 of Revenue Regulations No. 6-2001. In reply thereto, please be informed that Section 3 of Revenue Regulations No. 6-2001 dated July 31, 2001, amending Section 2.57.2 (E)(3) of Revenue Regulations No. 2-98, defines the term "Specialty Contractor" as "Those 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 the creditable withholding tax at the rate of 2%. HTCAED 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% (formerly 1%) effective October 1, 2001, in accordance with Section 3 of Revenue Regulations No. 6-2001, amending Section 2.57.2 (E) of Revenue Regulations No. 2-98." In the case of Commissioner of Internal Revenue vs. The Court of Tax Appeals and Avecilla Building Corporation, 134 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 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 DCCD is a specialty contractor. Accordingly, the professional fees that DCCD receives from its clients are subject to creditable withholding tax at the rate of 2% pursuant to Section 2.57.2(E)(3) of Revenue Regulations No. 2-98, as amended by Section 3 of Revenue Regulations No. 6-2001. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. HcTSDa Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC, Commissioner of Internal Revenue