SCV & Co.

December 3, 2007 BIR RULING [DA-609-07] R.R. 6-2001 BIR Ruling No. 237-90; DA-113-2003; DA-380-2004; DA-610-2006 SCV & Co. 6760 Ayala Avenue Makati City Attention: Atty. Romulo S. Danao, Jr. Partner Gentlemen : This refers to your letter dated June 22, 2007 requesting on behalf of your client, Aboitiz Jebsen Bulk Transport Corporation ("Abojeb") , for confirmation of your opinion that the professional fees received by Abojeb from Aboitiz Transport System Corporation (ATSC) and from Abojeb's other clients are subject to the creditable withholding tax at the rate of two percent (2%) pursuant to Section 2.57.2 (E) (1) of Revenue Regulations No. 2-98, as amended by Section 3 of Revenue Regulations No. 6-2001. As represented, Abojeb is a corporation organized and existing under the laws of the Philippines with office address at 2nd Floor, Harbour Center II, Railroad and Chicago Streets, South Harbor, Port Area, Manila. It is engaged among others, to work on steamships, barges, tugboats, lighters and other vessels of any class and generally to carry on the business of ship-owners. ATSC, a domestic corporation, is an integrated transport and logistic solutions provider and is the owner of the MV "Superferry" vessels as well as other vessels that transport passengers and cargo all over the Philippines. DAESTI ATSC has appointed Abojeb as General Engineers of ATSC's vessels, for which, ATSC and Abojeb have entered into an "Agreement" identifying the duties and responsibilities of the parties. Under the Agreement, Abojeb as "Contractor" has the following general responsibilities to the "Owners", ATSC: (a) to maintain the vessel on behalf of the Owners in all respect in an economic and proper manner and in accordance with sound ship technical supervision and maintenance practices; and (b) to protect and promote the interest of the Owners in all matters relating to the efficient operations of the vessel. In reply, please be informed that Section 2.57.2 (E) (1) of Revenue Regulations (RR) No. 2-98, as amended by Section 3 of RR No. 6-2001, as further amended by RR No. 12-2001, RR 17-2003 and RR 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%). HEcaIC In applying the provisions of the above-mentioned Withholding Tax Regulations, it is clear that Abojeb is indeed a general engineering contractor as its principal contracting business in connection with its engineering work on steamships, barges, tugboats, lighters and other vessels of any class, and efficient operations of the vessels require specialized engineering knowledge and skill. In BIR Ruling No. DA-113-03 dated April 8, 2003, this Office had occasion to rule as follows: ". . . 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% [formerly 1%]. 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. STcEIC xxx xxx xxx IN VIEW OF THE FOREGOING, this Office hereby holds that SPO1 is a general engineering contractor. Accordingly, as a general engineering contractor, payments made by FGPC to SPO1 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." The scope and application of the term "General Engineering Contractor" as discussed in the aforecited ruling was reiterated in BIR Ruling No. DA-484-04 dated September 10, 2004, BIR Ruling No. DA-285-05 dated June 23, 2005, and BIR Ruling No. DA-610-06 dated October 11, 2006. In BIR Ruling No. DA-484-04, this office ruled that inasmuch as Telecoms Infrastructure Corporation of the Philippines (Telicphil) is a corporation authorized to perform design, planning, technical administration, maintenance and other similar or related services geared toward the establishment of a telecommunications backbone facility or network, it is, therefore considered a general engineering contractor. Hence, this office ruled that gross payments to Telicphil for its services are subject to creditable withholding tax at the rate of 2% in accordance with Section 3 of RR No. 6-01, amending Section 2.57.2 (E) of Revenue Regulations No. 2-98. In the same vein, in BIR Ruling No. DA-285-05, this office was of the view that Electrowatt-Ekono (Philippines), Inc. (EEPH), a corporation whose primary purpose is to engage in the operation, maintenance, service, repair and rehabilitation of power plants, is a General Engineering Contractor. Specifically, the services to be rendered by EEPH for its clients generally include: 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 practices. Similarly situated is BIR Ruling DA-610-06 where this office, citing BIR Ruling No. DA-285-05 and BIR Ruling No. DA-113-03, ruled that payments made by Monde Energy Cogeneration, Inc. to Crownpower Cogeneration Services, Inc. for the supply of manpower and maintenance of a cogeneration plant are subject to 2% creditable withholding tax prescribed under Section 2.57.2 (E) (1) of Revenue Regulations No. 2-98, as amended by Section 3 of RR No. 6-2001. Based on the foregoing, this Office hereby confirms your opinion that Abojeb is a general engineering contractor. Accordingly, the professional fees that Abojeb receives from the services it provides to ATSC and other clients are subject to creditable withholding tax at the rate of 2% in accordance with Section 2.57.2 (E) of Revenue Regulations No. 2-98, as amended by Section 3 of RR No. 6-2001 and as last amended by RR No. 30-2003. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service