BIR Ruling [DA-610-06]

October 11, 2006 BIR RULING [DA-610-06] Rev. Regs. No. 6-2001; BIR Ruling Nos. DA-285-05 SyCip Gorres Velayo & Co . 6760 Ayala Avenue Makati City Attention: Atty. R.C. Vinzon Tax Services Gentlemen : This refers to your letter dated September 8, 2005 requesting on behalf of your client, Monde Energy Cogeneration, Inc . (Monde Energy) for confirmation of your opinion that its payments to Crownpower Cogeneration Services, Inc. (Crownpower) for the supply of manpower and maintenance of the cogeneration plant is subject to two percent (2%) creditable withholding tax prescribed under Section 2.57.2(E) of Revenue Regulations (Rev. Regs.) No. 2-98, as amended by Rev. Regs. No. 6-2001. As represented, Monde Energy is a corporation organized and existing under the laws of the Philippines. It is engaged in the business of private power and steam generation and supply. Its power generation facilities are located in Balibago. Sta. Rosa, Laguna. Crownpower is a domestic corporation engaged in the business of constructing, operating, developing, testing, commissioning electrical power generation, desalination, co-generation related energy facilities and by products but not limited to CO2, steam, desalinated water and others, for its own use and to sell the same to other persons, corporations or entities and to acquire all equipment, machineries, spare parts and other items or supplies as may be necessary to implement and pursue the business. SCaIcA On January 28, 2005, Monde Energy and Crownpower entered into an agreement denominated as "Supply of Manpower Operation and Maintenance Agreement (Agreement). Under the Agreement, Crownpower shall render services to Monde Energy which generally includes but is not limited to the following: which generally includes but is not limited to the following: 1. supply of manpower for: a. the operation and maintenance of Monde Energy's co-generation plant; b. plant safety, cost and materials control; c. production of routine reports and maintenance of record systems; d. the preparation of detailed specifications, tender documents, reviews for all consumables, spares, specialist maintenance services and make recommendations for award of contracts; 2. operation and maintenance or the co-generation plant; 3. routine maintenance required by the co-generation plant; 4. supply of manpower for the planning and control of day to day operation and maintenance works of the plant; 5. implement the power and steam purchase agreement on behalf of the buyer; and 6. guarantee the performance of the plant using the agreed, achievable standards based on results of the performance tests. 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: '. . . 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 RRNo.12-2001 and RR17-2003, and as last amended by RRNo.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 RulingNo.DA-113-03 dated April 8, 2003 whereby this Office held that: 'xxx xxx xxx 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.' xxx xxx xxx" In view of the foregoing, this Office hereby confirms your opinion that Monde Energy's payments to Crownpower for the supply of manpower and maintenance of the cogeneration plant are subject to two percent (2%) creditable withholding tax prescribed under Section 2.57.2(E) of Revenue Rev. Regs. No. 2-98, as amended by Rev. Regs. No. 6-2001. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service