BIR Ruling No. 045-15

February 9, 2015 BIR RULING NO. 045-15 E.O. 226; RR 16-2011; Secs. 57 (B); 106 (A) (1) (a);196 NIRC; BIR Ruling No. 334-11 DMC Urban Property Developers, Inc. 4th Floor Dacon Building 2281 Chino Roces Avenue (formerly Pasong Tamo Ext.) Makati City Attention: Joy B. Fajardo Accounting Officer Gentlemen : This refers to your letter dated July 22, 2014 stating that DMC Urban Property Developers, Inc. (DMC UPDI for brevity) with Tax Identification No. 000-352-360-000 is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) under Company Reg. No. 76125. It is registered with the Board of Investments (BOI) under Certificate of Registration No. 2013-182 dated September 06, 2013 as an expanding developer of low-cost mass housing project (Palmetto Place Building 3 Ma-a Road cor. Gem Road, Davao City Project) on a Non-Pioneer status in accordance with the Omnibus Investments Code of 1987 or Executive Order (EO) No. 226. DMC UPDI has been granted Income Tax Holiday (ITH) by the BOI for a period of three (3) years from September 2013 or actual start of commercial operations/selling pursuant to EO 226. DMC UPDI's Palmetto Place Building 3 Ma-a Road cor. Gem Road, Davao City Project is registered with Housing and Land Use Regulatory Board (HLURB) under Certificate of Registration No. 23273 and holds HLURB License to Sell No. 24835: and under the Specific Terms and Conditions of its BOI Registration, DMC UPDI shall construct and sell seventy nine (79) units of low-cost mass housing for Palmetto Place Building 3 Ma-a Road cor. Gem Road, Davao City Project based on the following schedule: HTcADC Year Volume (No. of Units) 1 18 2 38 3 23 Total 79 ==== 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 DMC UPDI, 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. Accordingly, since DMC UPDI's Palmetto Place Building 3 Ma-a Road cor. Gem Road, Davao City Project is a BOI registered project, this Office is of the opinion as it hereby holds, that income payments received by DMC UPDI in connection with its housing projects, Palmetto Place Building 3 Ma-a Road cor. Gem Road, Davao City Project (on the 79 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 3 years from September 2013 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 revenues generated from its registered activity, DMC UPDI's Palmetto Place Building 3 Ma-a Road cor. Gem Road, Davao City Project involving the 79 low-cost mass housing units. Furthermore, such exemption shall not cover revenues from units with selling price exceeding Three Million Pesos (P3,000,000.00). 2 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 DMC UPDI's Palmetto Place Building 3 Ma-a Road cor. Gem Road, Davao City Project is not automatic as it still has to comply with the following provisions of the Specific Terms and Conditions of its BOI Registrations, 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. The Board may reduce the ITH if the project does not realize the extent of economic benefits represented by the proponent at the time of its application. The enterprise shall comply with the following representations: aScITE a. Net Value Added (NVA) should be at least 25% Year 1 Year 2 Year 3 NVA 59% 100% - b. Job Generation Number of Employees Year 1 Year 2 Year 3 Total Employees 30 221 - c. Investments and Timetable Activity Schedule Related Cost Expense/s (In Php'000) Land acquisition 1990 Land cost 4,229 Secure necessary March Pre-operating 6,359 license/permit/ 2009- expenses registration from the government/ November training costs 2012 Site preparation February Land/site 7,829 and development 2012 to development September cost 2013 Building construction March Building 144,407 2012-April construction 2014 cost Capital Equipment August Cost of 8,030 Acquisition 2013 capital equipment Start of commercial September Working 2,542 operation 2013 capital Total Project Cost 173,396 ====== d. Sales Revenues Year Volume (No. of Units) Value (Php'000) 1 18 47,680 2 38 99,795 3 23 60,846 Total 79 208,321 === ======= Net income that exceeds 10% of the revenue represented at the time of application shall not be eligible to ITH unless, the Board is informed in writing by the proponent in advance before the revenue is expected to exceed the projections in the application for registration submitted to the Board. 2. The enterprise shall submit audited segregated income statements for this registered project. Net income from operation of registered activity shall be certified under oath by CEO or CFO. 3. 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). 4. Secure from the HLURB an endorsement that it has faithfully complied with the approved development plan and a "Certificate of Good Housekeeping". HEITAD 5. 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. 6. 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. 7. 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. 8. The enterprise shall submit proof of compliance that it has developed socialized housing project using either of the following schemes, otherwise, the ITH for that particular taxable year shall be deemed forfeited: a. Investment: 20% of total saleable area (estimated at 851.48 sqm); or b. Direct Participation Scheme (at the option of the registered developer); i. 30% x (20% of the Building Construction Cost) (estimated at P8.664 M); or ii. 40% of ITH (P1.191 M). The investment scheme may be complied with through any of the following modes: (1) New Settlement; (2) Slum Upgrading; and (3) Joint-Venture Projects with either the local government units or any of the housing agencies. Under the Direct participation Scheme, the Developer shall make contribution to an accredited NGO/institution engaged in socialized housing and community development projects. 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, DMC UPDI's Palmetto Place Building 3 Ma-a Road cor. Gem Road, Davao City Project was clearly granted a 3-year ITH but such terms and conditions do not provide for any exemption from other taxes that DMC UPDI may be subject to on its business transactions. Thus, DMC UPDI's Palmetto Place Building 3 Ma-a Road cor. Gem Road, Davao 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. 3 Thus, only the sales by DMC UPDI's Palmetto Place Building 3 Ma-a Road cor. Gem Road, Davao City Project of housing units with selling prices of not more than the aforementioned price ceilings shall be exempt from VAT. It should be understood that DMC UPDI's Palmetto Place Building 3 Ma-a Road cor. Gem Road, Davao City Project shall be constituted as a withholding agent for the government if it acts as employer and any of its employees receive 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 Revenue Regulations No. 2-98, as amended. Likewise, DMC UPDI's Palmetto Place Building 3 Ma-a Road cor. Gem Road, Davao 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. ATICcS Finally, DMC UPDI's Palmetto Place Building 3 Ma-a Road cor. Gem Road, Davao 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. 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. No. 6 (a) (i) of the BOI Specific Terms and Conditions; License to Sell covers 102 residential and 9 commercial units. 3. 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.