Ayala Property Management Corporation

February 5, 2009 BIR RULING [DA-(C-017) 059-09] RR 6-2001; DA-575-06 Ayala Property Management Corporation 5/F Glorietta 4, Ayala Center Makati City Attention: Attys. Mildo C. Sison and Elner A. Reyes Tax Counsels Gentlemen : This refers to your letter dated November 28, 2008 stating that Ayala Property Management Corporation (APMC) is a domestic corporation duly organized and existing under Philippine laws with office address at 5th, Floor, Glorietta 4, Ayala Center, Makati City. It is engaged in the business of providing technical consultancy in property development, management, construction and maintenance of any building, structure, construction or improvement of any kind, building and technical support services, architectural and engineering design and plan evaluation, financial and administrative services, space planning, lease re-measurement, infrastructure and waterworks services pursuant to its primary and secondary purposes as provided in its Amended Articles of Incorporation submitted to the Securities and Exchange Commission (SEC). In pursuit of its business, APMC employs the services of project managers, engineers, advisers, surveyors, technicians, researchers and other professional and technical men to prepare plans, project studies, 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. As such, APMC undertakes activities that require the use of special skills and it uses specialized trades and crafts to promote its business. On the basis of the foregoing facts, you now request for a confirmation of opinion that: 1. For purposes of withholding tax, APMC should be classified as a specialty contractor in light of the services provided to its clients; and 2. The professional fees that APMC receives from its clients shall be subject to creditable withholding tax at the rate of 2% under Section 2.57.2 (E) (3) of Revenue Regulations (RR) No. 2-98, as amended by Section 3 of RR No. 6-2001. In reply, please be informed that Section 3 of RR No. 6-2001 dated July 31, 2001, amending Section 2.57.2 (E) (3) of RR No. 2-98, provides the applicable withholding tax rate to be imposed on gross payments made to certain contractors, whether individual or corporate, such as general engineering contractors, general building contractors and specialty contractors. Under the said regulations, the applicable withholding tax rate for these transactions is two percent (2%). STcEaI For purposes of defining the businesses covered by the said withholding tax rate, a description and/or enumeration of the activities undertaken by entities falling under each of these categories are provided in the above-mentioned regulations, as follows: "Section 2.57.2 Income payment subject to creditable withholding tax and rates prescribed thereon . Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines: xxx xxx xxx (E) Income payments to certain contractors . On gross payments to the following contractors, whether individual or corporate Two percent (2%) (1) General engineering contractors Those whose principal contracting business in connection with fixed works requiring specialized engineering knowledge and skill, including the following divisions or subjects: (a) Reclamation works; (b) Railroads; (c) Highways, streets and roads; (d) Tunnels; (e) Airports and airways; (f) Waste reduction plants; (g) Bridges, overpasses, underpasses and other similar works; (h) Pipelines and other systems for the transmission of petroleum and other liquid or gaseous substances; (i) Land leveling; (j) Excavating; (k) Trenching; (l) Paving; and (m) Surfacing work. (2) General building contractors Those whose principal contracting business is in connection with any structure built, for the support, shelter and enclosure of persons, animals, chattels, or movable property of any kind, requiring in its construction the use of more than two unrelated building trades or crafts, or to do or superintend the whole or any part thereto. Such structure includes sewers and sewerage disposal plants and systems, parks, playgrounds, and other recreational works, refineries, chemical plants and similar industrial plants requiring specialized engineering knowledge and skills, powerhouse, power plants and other utility plants and installation, mines and metallurgical plants, cement and concrete works in connection with the above-mentioned fixed works. cHaICD (3) Specialty Contractors 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." In BIR Ruling No. DA-575-06 dated September 22, 2006, this Office opines that Constech Management Group, Inc. (CMGI), a corporation with the primary purpose of engaging in the full scope of research, project studies, consultations and property management in the field of electrical, mechanical, fire protection, sanitary, electronics and structural systems, and carries on the business with project managers, advisers, technicians, investigators and researchers in the field of industrial, commercial, residential and infrastructural development and commerce of all and every description. In pursuit of this objective, said corporation renders services in building and other civil works projects including, but not limited to initial design, tendering procedures, contract arrangements, cost studies and planning, master development programming, tender contract analysis and report, advisory contract administration can be classified as a specialty contractor. We proceed further by stating that: ". . . the professional fees that CMGI receives for quantity surveying services 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 said BIR Ruling cited pertinent decisions of the Supreme Court on the matter, one of which is the case of Commissioner of Internal Revenue vs. The Court of Tax Appeals and Avecilla Building Corporation, 134 SCRA 49, where a corporation authorized to render general engineering and contracting of all kinds of constructions and structures, employing and contracting with architects, engineers, surveyors, chemists and other technical men to perform engineering and architectural work, including the preparation of surveys, plans, specifications, estimates, etc., and to act as consulting and or supervising engineers and architects in connection with the said contracting and building business is considered a contractor under then Section 191 of the Tax Code, which lists the persons subject to the then contractor's tax. The High Court held that: "The respondent corporation, which has a distinct and separate personality from its 'work engineers', rendered technical services to the Philippine National Bank, the Development Bank of the Philippines and the Social Security System in connection with the construction of their buildings. The law imposes a 3% percentage tax on among others, building . . . and other construction work contractors. The law does not distinguish actual from technical services performed by the contractor. Where the law does not distinguish the court should not distinguish. (Robles v. Zambales Chromite Mining Co., 104 Phil. 688) Hence, a building or any other construction work contractor like the Avecilla Building Corporation whether engaged in actual or technical services in relation to its construction business is liable to the 3% contractor's tax under Section 191 of the National Internal Revenue Code, as amended." Further, in the case of Hon. Efren I. Plana, in his capacity as Commissioner of Internal Revenue vs. Court of Tax Appeals and Engineering Development Corporation of the Philippines, G.R. No. L-52018 (February 23, 1990), the Supreme Court likewise had the occasion to rule that a corporation which is 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 is deemed a specialty contractor under Section 9 (e) of Republic Act (RA) No. 4566. For reference, Section 9 (e) of RA No. 4566 provides that: "(e) A 'specialty contractor' is a person 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." aIcDCA The Supreme Court held that the said law refers to "the performance of construction work" without distinction. A contractor should be understood and considered within the context of Section 191 of the Code as explained in the Avecilla case. Furthermore, the Supreme 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. Statutory developments on the matter reinforce our view. Under Section 191, as amended by Presidential Decree No. 69, which later became Section 205 of the National Internal Revenue Code of 1977, the term "independent contractors" includes persons, juridical or natural, whose activity consists essentially of the sale of all kinds of services for a fee, regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractors or their employees . This was but an enactment into law of the definition of the term 'independent contractor' as it was understood under existing jurisprudence." (Underscoring supplied) Such being the case, for purposes of creditable withholding tax, APMC is classified as a specialty contractor since it uses special skills in the furtherance of its business, and that as such specialty contractor, it will be subject to creditable withholding tax at the rate of 2% on the professional fees it receives from its clients pursuant to Section 2.57.2 (E) (3) of RR No. 2-98, as amended by RR 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service