BIR Ruling No. 024-14

January 17, 2014 BIR RULING NO. 024-14 E.O. 226; RR 16-2011; Secs. 57 (B); 106 (A) (1) (a); 196 NIRC; BIR Ruling No. 334-11 Liberty Land Corporation 224 J. Pacana Street, Puntod Cagayan de Oro City Attention: Gladeys Jill A. Santos-Cua Practitioner Gentlemen : This refers to your letter dated February 19, 2013 stating that Liberty Land Corporation (" Liberty " for brevity) with Tax Identification No. 001-748-244 is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) under Company Reg. No. AS092-3093. It is registered with the Board of Investments (BOI) as an Expanding Developer of Low-Cost Mass Housing Project (Bloomingdale Subdivision Phase 4 Iponan, Cagayan de Oro City) on a Non-Pioneer status under Certificate of Registration No. 2012-220 dated October 08, 2012 in accordance with the Omnibus Investments Code of 1987 or Executive Order (EO) No. 226. Liberty has been granted Income Tax Holiday (ITH) by the BOI for a period of three (3) years from October 2012 or actual start of commercial operations/selling, whichever is earlier but in no case earlier than the date of registration. Liberty's Bloomingdale Subdivision Phase 4 Iponan, Cagayan de Oro City Project is registered with Housing and Land Use Regulatory Board (HLURB) under Certificate of Registration No. 23182; and holds HLURB License to Sell No. 24803; and under the Specific Terms and Conditions of its BOI Registration, Liberty Land Corporation shall construct and sell one hundred twenty four (124) units of low-cost mass housing for Bloomingdale Subdivision Phase 4 Iponan, Cagayan de Oro City Project based on the following schedule: Year Volume (No. of Units) Value (P'000) 1 21 22,150 2 51 51,750 3 26 26,350 4 12 12,500 5 14 13,300 Total 124 126,050 ===== ======== On the basis of the foregoing, you now request for an opinion on the tax consequences of the said ITH granted by BOI. Specifically, if Liberty, being a BOI-registered enterprise, is exempt from the payment of the creditable withholding tax (CWT) imposed under Revenue Regulations No. 2-98 on income payments received during the aforementioned period with respect to its registered activity. In reply, please be informed that under Section 2.57.5 (B) (2) of Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001 implementing Section 57 (B) of the Tax Code of 1997, as amended, the withholding tax prescribed in the said Regulations shall not apply to income payments to persons enjoying exemption from the income tax provided by Republic Act No. 7916 and the Omnibus Investments Code of 1987. aEIcHA Accordingly, since Liberty's Bloomingdale Subdivision Phase 4 Iponan, Cagayan de Oro City Project is a BOI registered project, this Office is of the opinion as it hereby holds, that income payments received by Liberty in connection with its housing project, Liberty's Bloomingdale Subdivision Phase 4 Iponan, Cagayan de Oro City Project (on the 124 low-cost mass housing units as mentioned in the Specific Terms and Conditions of its BOI Registration) , is exempt from CWT under RR No. 2-98, as amended by RR No. 6-2001, for a period of three (3) years from October 2012 or actual start of commercial operations/selling, whichever is earlier but in no case earlier than the date of registration. 1 It must be emphasized, however, that the above exemption from CWT covers only income directly attributable to revenues generated from its registered activity, Liberty's Bloomingdale Subdivision Phase 4 Iponan, Cagayan de Oro City Project involving 124 low-cost mass housing units. Furthermore, such exemption shall not cover revenues from units with selling price exceeding Two Million Five Hundred Pesos (P2,500,000.00).In the computation of ITH, interest income from in-house financing shall not be considered as revenues generated from the registered activity. Moreover, the entitlement to ITH of Liberty's Bloomingdale Subdivision Phase 4 Iponan, Cagayan de Oro City Project is not automatic as it still has to comply with the following provisions of the Specific Terms and Conditions of its BOI Registration, viz. : 1. In the grant of incentives, the extent of the project's ITH entitlement shall be based in the project's ability to contribute to the economy's development based on the following parameters in this order of importance: (1) project's net value added, (2) job generation, (3) multiplier effect, and (4) measured capacity. In the event that the registered enterprise fails to implement the project as represented in its project application, the Board may reduce the project's ITH entitlement proportionate to the actual performance of the enterprise. The project's entitlement to incentives shall be based on the following: a. Net Value Added (NVA) should be at least 25% Year Year Year Year Year 1 2 3 4 5 Total 12,866 22,955 10,103 2,661 3,180 Construction Cost Cost of Raw 4,410 11,811 4,813 908 1,271 Materials NVA 66% 49% 52% 66% 60% b. Job Generation SDIaHE Number of Employees Year Year Year Year Year 1 2 3 4 5 Total 123 123 123 123 123 Employees c. Investments and Timetable Activity Schedule Related Cost Expense/s (In Php'000) Land acquisition Jan. 2012- Land cost 4,942 Dec. 2014 Secure necessary June 2011 Pre-operating 259 license/permit/ expenses registration from the government/ training costs Site preparation and March Land/site 13,629 development 2011- development Dec. 2015 House construction March House 33,194 2011- construction Dec. 2015 cost Start of commercial October Working 10,353 operation 2012 capital Total 62,376 Project Cost ======= d. Sales Revenues Year Volume (No. of Units) Value (P'000) 1 21 22,150 2 51 51,750 3 26 26,350 4 12 12,500 5 14 13,300 Total 124 126,050 ===== ======== Net income qualified for ITH availment shall not exceed by more than 10% of the projected income represented by the enterprise in its application, provided the project's actual investments and employment match the enterprise's representations in its application. In cases where the project's actual revenues exceed the projections in its application by more than 10%,the Board may increase the project's ITH availment proportionately for reasons such as but not limited to (a) additional investments; (b) new markets/orders; (c) additional employment and/or increase in number of working shifts. Request/s for adjustment of projected income may be submitted to the Board within the ITH entitlement period. 2. The enterprise shall submit a list of common cost items and cost allocation methodology for its other projects/activities (whether BOI-registered or non-registered) and the methodology adopted in allocating the common costs between the registered activity/ies and non-registered activity/ies. 3. Secure from the HLURB an endorsement that it has faithfully complied with the approved development plan and a "Certificate of Good Housekeeping". 4. File an application with the BOI Incentives Department within one (1) month from filing of the final Income Tax Return (ITR) with the Bureau of Internal Revenue (BIR) in order to validate the claim for income tax exemption. The application shall be accompanied by a certification from the Social Security System (SSS) that the enterprise is in good standing in the remittance of SSS contributions of its employees. 5. Secure a Certificate of ITH Entitlement (CoE) from the BOI Supervision and Monitoring Department prior to filing of ITR with the BIR; otherwise, ITH for that particular year without CoE shall be forfeited. 6. In the event the enterprise fails to maintain the 75:25 debt-equity ratio requirement, it shall show proof that the construction of housing units have been completed and delivered to buyers prior to availment of ITH; otherwise, the enterprise shall not be entitled to ITH and shall be required to refund any capital equipment incentives availed of. 7. The enterprise shall submit proof of compliance that at least twenty percent (20%) of the total subdivision area (estimated at 19,079 sq.m.) or total subdivision project cost (estimated at Ph62.376 M) has been developed and allocated for socialized housing within one year from date of registration or prior to availment of ITH, whichever is earlier. This may be done through any of the following modes: (1) New settlement; (2) Slum Upgrading, and (3) Joint Venture Projects. Otherwise, the ITH for that particular year shall be deemed forfeited. SHAcID Furthermore, BOI-registered enterprises enjoy no tax exemption/privileges other than those granted under E.O. 226. In this regard, under the terms and conditions of its BOI registration, Liberty's Bloomingdale Subdivision Phase 4 Iponan, Cagayan de Oro City Project was clearly granted a 3-year ITH but such terms and conditions do not provide for any exemption from other taxes that Liberty may be subject to on its business transactions. Thus, Liberty's Bloomingdale Subdivision Phase 4 Iponan, Cagayan de Oro City Project will remain subject to Value-Added Tax (VAT) and Documentary Stamp Tax (DST) on its sales of house and lot units pursuant to Sections 106 (A) (1) (a) and 196 of the Tax Code of 1997, as amended. (BIR Ruling No. 334-11 dated September 7, 2011) In relation thereto, Section 109 (1) (P) of the Tax Code of 1997 provides, that the sale of residential lot valued at One Million Nine Hundred Nineteen Thousand Five Hundred Pesos (P1,919,500.00) and below, or house and lot and other residential dwellings valued at Three Million One Hundred Ninety Nine Thousand Two Hundred Pesos (P3,199,200.00) and below is VAT-exempt. 2 Thus, only the sales by Liberty's Bloomingdale Subdivision Phase 4 Iponan, Cagayan de Oro City Project of housing units with selling price of not more than the aforementioned price ceilings shall be exempt from VAT. It should be understood that Liberty's Bloomingdale Subdivision Phase 4 Iponan, Cagayan de Oro City Project shall be constituted as a withholding agent for the government if it acts as employer and any of its employees received compensation income subject to compensation withholding tax, or if it makes payments to individuals or corporations subject to the withholding taxes at source as required under Chapter XIII and Section 57 of the Tax Code of 1997, as amended and implemented by Revenue Regulations No. 2-98, as amended. Likewise, Liberty's Bloomingdale Subdivision Phase 4 Iponan, Cagayan de Oro City Project is required to file on or before the 15th day of the fourth month following the close of its accounting period a Profit and Loss Statement and Balance Sheet with the Annual Information Return under oath, stating its gross income and expenses incurred during the taxable year. Finally, Liberty's Bloomingdale Subdivision Phase 4 Iponan, Cagayan de Oro City Project's books of accounts and other pertinent records shall be subject to periodic examination by revenue enforcement officers of this Bureau for the purpose of ascertaining whether it has been complying with the conditions under which it has been granted tax exemption or tax incentives and its tax liability, if any, pursuant to Section 235 of the Tax Code of 1997, as amended. 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. TEAcCD Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Movement of ITH period is subject to Art. 7 of E.O. 226 per BOI Specific Terms and Conditions No. 1. 2. The increase in the threshold amount for the sale or lease of goods or properties or the performance of services covered by Section 109 (P), (Q) and (V) of the 1997 Tax Code took effect on January 1, 2012, pursuant to Revenue Regulations No. 16-2011 dated October 27, 2011.