BIR Ruling No. 164-13

April 30, 2013 BIR RULING NO. 164-13 EO 226; 334-11; 188-12 Property Company of Friends, Inc. Profriends Center 55 Tinio Street Barangay Addition Hills Mandaluyong City Attention: Ms. Girlie B. Seco OIC-Realty Services Division Gentlemen : This refers to your letter dated January 6, 2011 requesting exemption from income tax and consequently from creditable withholding tax as prescribed in Revenue Regulations No. 2-98, as amended, on account of the housing project's registration with the Board of Investments (BOI) under Executive Order (EO) No. 226, otherwise known as the "Omnibus Investments Code of 1987". It is represented that Property Company of Friends, Inc. (Corporation) is a corporation duly registered with the Securities and Exchange Commission (SEC) under SEC Registration No. A199902864 with TIN 201-981-861; that it has a low-cost housing project known as the Monticello Villas Phase I located at Balabag, Pavia, Iloilo; that the said housing project has been registered with the BOI per Certificate of Registration No. 2010-138 as a new developer of low-cost mass housing project on a non-pioneer status under the Omnibus Investments Code of 1987 (EO 226); that the Corporation shall be entitled to income tax holiday (ITH) for its Monticello Villas Phase I project for a period of four (4) years from August 2010 or actual start of commercial operations/selling, whichever is earlier, but in no case earlier than the date of registration; and that the ITH of the Corporation shall be limited only to the revenue generated from the registered housing project (Monticello Villas Phase I) . The Corporation, under the Specific Terms and Conditions of its BOI Registration for Montecillo Villas Phase I housing project, is obligated to construct and sell 606 low-cost housing units based on the following schedule: aCcHEI Year No. of Units (Isabella) 1 152 2 152 3 152 4 150 Total 606 === that the Corporation shall adhere to the following committed selling prices: House Model (40 sq. m.) Selling Price Isabella P725,000.00 In reply thereto, 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 (RA) No. 7916 and the Omnibus Investments Code of 1987. (BIR Ruling No. 334-2011 dated September 7, 2011) Accordingly, since Montecillo Villas Phase I is a BOI registered housing project, this Office holds that income payments received by Property Company of Friends, Inc. in connection with the aforementioned housing project, are exempt from the creditable withholding tax imposed under RR No. 2-98, as amended by RR No. 6-2001, for a period four (4) years beginning from August 2010 or actual start of commercial operations/selling, whichever is earlier, but in no case earlier than the date of registration. It must be emphasized, however, that the above exemption from the creditable withholding tax covers only the revenues generated from the Corporation's registered housing project, Montecillo Villas Phase I. Furthermore, such exemption shall not cover revenues from units with selling price exceeding Three Million Pesos (P3,000,000.00). (BIR Ruling Nos. 334-2011 dated September 7, 2011 and 188-2012 dated March 21, 2012) 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. ACTIcS Moreover, the Corporation's entitlement to ITH for its housing project, Monticello Villas Phase I, is not automatic as it has still to comply with the provisions of the Specific Terms and Conditions of the BOI Registration, viz. : 1. Secure from the Housing and Land Use Regulatory Board (HLURB) an endorsement that it has faithfully complied with the approved development plan and a "certificate of good housekeeping"; 2. File an application with the BOI Incentive Department within one (1) month from the 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; 3. 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; 4. The enterprise shall maintain the 75:25 debt-to-equity requirement prior to availment of ITH. Otherwise, the enterprise shall not be entitled to ITH and any capital equipment incentive availed of shall be refunded accordingly; 5. The Corporation shall submit proof of compliance that at least twenty percent (20%) of the total subdivision area of total subdivision project cost, at the option of the developer, has been developed and allocated for socialized housing whether within or outside the same city or municipality. This may be done through any of the following modes: (i) new settlement; (ii) slum upgrading; and (iii) joint venture projects. Otherwise, the ITH for that taxable year shall be deemed forfeited; 6. The enterprise shall ensure (a) that its contractors are duly licensed by the Philippine Contractors Accreditation Board (PCAB) as required under Republic Act 4566 (Contractors License Law) and (b) that any construction activity, under its project and supervision shall be undertaken in accordance with the rules and regulations prescribed by PCAB as well as all applicable laws; and AaDSEC 7. The enterprise shall submit to the BOI Supervision and Monitoring Department, on a quarterly basis within fifteen (15) days from the end of each quarter, a report on Actual Investments, Employment, Sales and other information that the Board may require at anytime with respect to the registered project starting on date of registration. Furthermore, BOI-registered enterprises enjoy no tax exemption/privileges other than those granted under EO 226. In this regard, under the terms and conditions of its BOI registration, the Corporation was clearly granted a 4-year ITH for its project, Monticello Villas Phase I, but such terms and conditions do not provide for any exemption from other taxes that the Corporation may be subject to on its business transactions. Thus, the Corporation will remain subject to value-added tax (VAT) and documentary stamp tax (DST) on its sales of condominium 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. Thus, only the sales by the Corporation of housing units with selling price of not more than the aforementioned price ceiling shall be exempt from VAT. It should be understood that the Corporation 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, the Corporation 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. SITCEA Finally, the Corporation'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