BIR Ruling No. 081-14

March 4, 2014 BIR RULING NO. 081-14 E.O. 226; RR 16-2011; Secs. 57 (B); 106 (A) (1) (a); 196 NIRC; BIR Ruling No. 334-11 Communities Quezon, Inc. Mezzanine Floor, Starmall Complex EDSA cor. Shaw Blvd. Mandaluyong City Attention: Atty. Cecilia A. Ramilo Tax Department Head Gentlemen : This refers to your letter dated November 21, 2012 stating that Communities Quezon, Inc. (Communities Quezon for brevity) with Tax Identification No. 008-117-039-000 is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) under Company Reg. No. CS201115442. It is registered with the Board of Investments (BOI) as a New Developer of Low-Cost Mass Housing Project (Camella Quezon Brgy. Isabang, Tayabas, Quezon) on a Non-Pioneer status under Certificate of Registration No. 2012-244 dated November 21, 2012. Communities Quezon has been granted Income Tax Holiday (ITH) by the BOI for a period of four (4) years from November 2012 or actual start of commercial operations/selling, whichever is earlier but in no case earlier than the date of registration. Communities Quezon's Camella Quezon Brgy. Isabang, Tayabas, Quezon Project is registered with Housing and Land Use Regulatory Board (HLURB) under Certificate of Registration Nos. 24340 and 24341, and holds HLURB License to Sell Nos. 26100 and 26101; and that under the Specific Terms and Conditions of its BOI Registration, the ITH of Communities Quezon shall cover only six hundred ninety (690) units of low-cost mass housing for Camella Quezon Brgy. Isabang, Tayabas, Quezon Project based on the following schedule: Year Volume (No. of Units) 1 128 2 216 3 184 4 162 Total 690 ==== 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 Communities Quezon, 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 Communities Quezon's Camella Quezon Brgy. Isabang, Tayabas, Quezon Project is a BOI registered project, this Office is of the opinion as it hereby holds, that income payments received by Communities Quezon in connection with its housing project, Camella Quezon Brgy. Isabang, Tayabas, Quezon (on the 690 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 4 years from November 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, Communities Quezon's Camella Quezon Brgy. Isabang, Tayabas, Quezon Project involving 690 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). In the computation of ITH, interest income from in-house financing shall not be considered as revenues generated from the registered activity. TCcSDE Moreover, the entitlement to ITH of Communities Quezon's Camella Quezon Brgy. Isabang, Tayabas, Quezon 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. The enterprise shall increase its Stockholders' Equity by at least PhP92,107,204.00 equivalent to 25% of the total project cost and shall submit proof of compliance before availment of ITH. Equity shall include paid-up capital stock, additional paid-in capital and unrestricted retained earnings, and restricted retained earnings provided that such is intended for the project. Appraisal surplus and treasury stock should not be included as part of stockholders equity for this purpose. 2. 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% Total Year 1 Year 2 Year 3 Year 4 NVA 97.50% 97.51% 97.50% 97.50% 97.508% b. Job Generation Pre-op Year 1 Year 2 Year 3 Year 4 Total 3 115 187 159 138 Employees c. Investments and Timetable Activity Schedule Related Cost Expense/s (In Php'000) Land acquisition September Land cost 53,598 2011 Secure necessary April 2012 Pre-operating 2,158 license/permit/ to expenses registration from December the government/ 2012 training costs Site preparation and September Land/site 91,138 development 2012 development to December 2015 Building October Building 314,063 construction 2012 to construction September 2016 Start of commercial November Working 5,000 operation 2012 capital Total 465,957 Project Cost ======= d. Sales Revenues EIAScH Year Volume (No. of Units) Value (Php'000) 1 128 174,422 2 216 292,038 3 184 250,487 4 162 217,853 Total 690 934,800 ======= ======= Net income qualified for ITH availment shall not be a result of gross revenues exceeding 10% of the projected gross revenue represented by the enterprise in its application provided the project's actual investments and employment match the enterprise's representations in its application. 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 the non-registered activity/ies. 4. Secure from the HLURB an endorsement that it has faithfully complied with the approved development plan and a "Certificate of Good Housekeeping". 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. Submit proof of compliance that at least twenty percent (20%) of the total subdivision area or total subdivision project cost has been developed and allocated for socialized housing within one year from date of registration or prior to availment of ITH, whichever is earlier. Otherwise, the ITH for that particular year shall be deemed forfeited. IaDSEA Compliance with the 20% socialized housing requirement must be completed within the ITH availment period and should be proportionate to the number of low-cost housing units being applied for ITH for the taxable year. 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, Communities Quezon's Camella Quezon Brgy. Isabang, Tayabas, Quezon Project was clearly granted a 4-year ITH but such terms and conditions do not provide for any exemption from other taxes that Communities Quezon may be subject to on its business transactions. Thus, Communities Quezon's Camella Quezon Brgy. Isabang, Tayabas, Quezon 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 Communities Quezon's Camella Quezon Brgy. Isabang, Tayabas, Quezon 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 Communities Quezon's Camella Quezon Brgy. Isabang, Tayabas, Quezon 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 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, Communities Quezon's Camella Quezon Brgy. Isabang, Tayabas, Quezon 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, Communities Quezon's Camella Quezon Brgy. Isabang, Tayabas, Quezon 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 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. aIETCA 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.