BIR Ruling No. 032-14

January 27, 2014 BIR RULING NO. 032-14 E.O. 226; RR 2-98; BIR Ruling No. 546-12; BIR Ruling No. 334-11 Property Company of Friends, Inc. No. 55 Tinio Street, Brgy. Addition Hills, Mandaluyong City Attention: Ms. Marilyn T. Santos Financial Control Group Head Gentlemen : This refers to your letter dated May 16, 2013, requesting for the issuance of a Ruling on the tax consequences of the Income Tax Holiday (ITH) granted to PROPERTY COMPANY OF FRIENDS, INC. by the Board of Investments (BOI) under Executive Order (EO) No. 226 otherwise known as the "Omnibus Investments Code of 1987", for a period of three (3) years from the start of commercial operations/selling. Documents submitted disclosed that PROPERTY COMPANY OF FRIENDS, INC., with Taxpayer's Identification No. (TIN) 201-981-861-000, is registered with the BOI as an Expanding Developer of Low-Cost Mass Housing Project on a Non-Pioneer status; that it is the developer of the following mass housing project: Project Name Location BOI Reg. Date of BOI Start of No. of No. Registration Commercial Units Operation/ ITH Lancaster Brgy. Alapan 2012-172 August 16, August 2012 133 Residences II-A, Imus, 2012 Phase V Annex Cavite that under its BOI Terms and Conditions, the following project shall construct and sell units of low-cost mass housing units based on the following schedule: Project Name Year No. of Units Sales Value (PhP) Lancaster Residences Phase V 1 45 39,150,000 Annex 2 45 39,150,000 3 43 37,410,000 Total 133 115,710,000 ==== =========== that Lancaster Residences Phase V Annex located at Brgy. Alapan II-A, Imus, Cavite is registered with the Housing and Land Use Regulatory Board (HLURB) under the following Certificate of Registration and was issued License to Sell, to wit: TIaDHE Project Name Location HLURB Certificate HLURB License to of Registration No./ Sell No./Date Date Issued Issued Lancaster Brgy. Alapan II-A, 24374/February 11, 26446/February 11, Residences Phase Imus, Cavite 2013 2013 V Annex that according to the Specific Terms and Conditions of its BOI Registration, PROPERTY COMPANY OF FRIENDS, INC. (Lancaster Residences Phase V Annex-Brgy. Alapan II-A, Imus, Cavite) is entitled to ITH for a period of three (3) years from August 2012 or the actual start of commercial operations whichever is earlier, but in no case earlier than the date of registration; that PROPERTY COMPANY OF FRIENDS, INC. (Lancaster Residences Phase V Annex-Brgy. Alapan II-A, Imus, Cavite)'s ITH shall be limited only to the revenue generated from the registered project; and that revenues from units with selling price exceeding P2.50M shall not be covered by ITH. In reply, please be informed that under Section 2.57.5 (B) (2) of Revenue Regulations 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 the Omnibus Investments Code of 1987. Accordingly, since PROPERTY COMPANY OF FRIENDS, INC. (Lancaster Residences Phase V Annex-Brgy. Alapan II-A, Imus, Cavite) is a BOI-registered project, this Office is of the opinion that income payments received by PROPERTY COMPANY OF FRIENDS, INC. in connection with the sale of units in its low-cost mass housing project, Lancaster Residences Phase V Annex-Brgy. Alapan II-A, Imus, Cavite, involving 133 low-cost mass housing units, are exempt from the creditable withholding tax imposed under RR No. 2-98, as amended by RR No. 6-2001, for a period of three (3) years from August 2012 or the actual start of commercial operations whichever is earlier but in no case earlier than the date of registration. 1 It must be emphasized, however, that the above exemption from creditable withholding tax covers only income directly attributable to revenues generated from the registered activity, Lancaster Residences Phase V Annex-Brgy. Alapan II-A, Imus, Cavite, involving 133 low-cost mass housing units. Furthermore, such exemption shall not cover revenues from units with selling price exceeding Two Million Five Hundred Thousand Pesos. (P2,500,000.00). (BIR Ruling No. 546-12 dated August 30, 2012) Moreover, the entitlement of PROPERTY COMPANY OF FRIENDS, INC. (Lancaster Residences Phase V Annex-Brgy. Alapan II-A, Imus, Cavite) to ITH is not automatic as such project has to comply with Items 2, 6, 9 a (i) (ii) (iii) (v), 11, 12 and 17 of the Specific Terms and Conditions of its pertinent BOI Registration, viz. : EITcaH (1) The enterprise shall submit proof of verified compliance with the socialized housing requirement for its housing projects (The Cedar Village, California West Hills Phase 6, Parc Regency E, Lancaster Villages Phase I, Montecillo Villas Phase 1, The Cedar Residences Phase 3, The Cedar Residences Phase 2) registered under the 2010 IPP, prior ITH availment and to be completed within the ITH entitlement period. Compliance to the 20% socialized housing requirement should be proportionate to the number of low-cost mass housing units being applied for ITH for the taxable year, e.g. , it total registered units is 300 and 100% is sold by the first year of availment, then the 20% socialized housing requirement for the 300 units should be met by the first year. (2) In the grant of incentives, the extent of the project's ITH entitlement shall be based on 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; a. Net Value Added should be at least 25% Yr1 Yr2 Yr3 Total Construction Cost 13,566,000 13,566,000 6,783,000 (Php) Cost of Raw Materials 958,095 958,095 915,513 (Php) NVA (%) 93% 93% 87% b. Job Generation Yr1 Yr2 Yr3 Employees paid on monthly basis 5 5 5 Workers paid on a daily basis - - - Full-time workers paid by 64 60 60 contractors Others (Managers and 2 2 2 Supervisors) Total 71 67 67 === === === c. Investments and Timetable Activity Schedule Related Cost Expense/s (Php) Site/Land acquisition May 2008 Raw Land Cost 4,141,200 Obtaining appropriate October 2010 Pre-operating 365,400 license/agreement/ to June 2012 Expenses permit from the government Site preparation and June 2011 to Land 6,090,000 development August 2011 Development - Hiring of contractors Cost - Completion of site preparation and development House Construction October 2011 to House 33,915,000 June 2013 Construction Cost Start of Commercial August 2012 Working 1,583,400 Operations Capital Total Project Cost 46,095,000 ========= d. Sales Revenues Year Sales Volume Sales Value (No. of Units) (Php) 1 45 39,150,000 2 45 39,150,000 3 43 37,410,000 Total 133 115,710,000 ========== 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; THacES (3) The enterprise shall submit the list of cost items common to all its projects/activities (whether BOI or not-BOI-registered) and the methodology adopted in allocating the common costs between the registered activity/ies and non-registered activity/ies. The methodology to be adopted in depreciation for fixed Assets particularly the Plant, Property and equipment account shall be the Straight Line depreciation method; (4) The interest Expense on the enterprise's liabilities shall be appropriately allocated between the registered activity/ies and the non-registered activity/ies; (5) The enterprise shall secure from HLURB an endorsement that it has faithfully-complied with the approved development plan and a "Certificate of Good Housekeeping" ; (6) An application should be filed with the BOI Incentives Department within one (1) month from the filing of the final ITR with BIR in order to validate the claim for income tax exemption. The application shall be accompanied by a certification by SSS that the enterprise is in good standing in the remittance of SSS contributions of its employees. Any request for extension of the reckoning date of ITH availment should be filed prior to the scheduled date or within ninety (90) days from the occurrence of fortuitous events and/or government delays; (7) The enterprise must secure a Certificate of ITH Entitlement (CoE) from the BOI Supervision and Monitoring Department (SMD) prior to filing the Income Tax Return (ITR) with the Bureau of Internal Revenue (BIR), otherwise, ITH for that particular taxable year without CoE is forfeited; (8) In the event the enterprise fails to maintain the 75:25 debt-to-equity requirement, it shall show proof that the construction of housing units have been completed and delivered to the 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; (9) The enterprise shall submit proof of compliance that at least twenty percent (20%) of the total subdivision area (estimated at 1,802 sq.m.) or total subdivision project cost (estimated at P9.219M), 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 taxable year shall be deemed forfeited; (10) The enterprise must abide by the principles of Good Corporate Governance. It must likewise accomplish the BOI form on self-rating Governance Scorecard every year as a requirement for ITH availment. AEDcIH Furthermore, BOI-registered enterprises enjoy no tax exemption/privileges other than those granted under E.O. 266. In this regard, under the terms and conditions of its BOI registration, PROPERTY COMPANY OF FRIENDS, INC. (Lancaster Residences Phase V Annex-Brgy. Alapan II-A, Imus, Cavite) was clearly granted 3-year ITH but such terms and conditions do not provide for any exemption from other taxes that it may be subject to on its business transactions. Thus, PROPERTY COMPANY OF FRIENDS, INC. (Lancaster Residences Phase V Annex-Brgy. Alapan II-A, Imus, Cavite) will remain subject to Value-Added Tax (VAT) and Documentary Stamp Tax (DST) on its sales of housing units pursuant to Sections 106 (A) (1) (a) and 196 of the Tax Code of 1997, as amended. (BIR Ruling No. 334-2011 dated September 7, 2011) In the computation of ITH, interest income from in-house financing shall not be considered as part of the revenues generated from the registered activity. 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. Thus, only the sales by PROPERTY COMPANY OF FRIENDS, INC. (Lancaster Residences Phase V Annex-Brgy. Alapan II-A, Imus, Cavite) of housing units with selling price of not more than the aforementioned price ceiling shall be exempt from VAT. It should be understood that PROPERTY COMPANY OF FRIENDS, INC. (Lancaster Residences Phase V Annex-Brgy. Alapan II-A, Imus, Cavite) 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 as source as required under Chapter XIII and Section 57 of the Tax Code of 1997, as amended and implemented by RR No. 2-98, as amended. Likewise, PROPERTY COMPANY OF FRIENDS, INC. (Lancaster Residences Phase V Annex-Brgy. Alapan II-A, Imus, Cavite) 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, PROPERTY COMPANY OF FRIENDS, INC. (Lancaster Residences Phase V Annex-Brgy. Alapan II-A, Imus, Cavite)'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. DacASC 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.