BIR Ruling No. 167-14

June 3, 2014 BIR RULING NO. 167-14 E.O. 226; RR 16-2011; Secs. 57 (B); 106 (A) (1) (a); 196 NIRC; BIR Ruling No. 334-11 Extraordinary Development Corporation 41st Floor, Joy Nostalg Ctr. 17 ADB Avenue, Ortigas Center San Antonio, Pasig Attention: Mr. Victor H. Manarang President Gentlemen : This refers to your letter dated March 13, 2014 stating that Extraordinary Development Corporation ( Extraordinary Development for brevity),with Tax Identification No. 000-761-994-000 is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) under Company Reg. No. 113494. It is registered with the Board of Investments (BOI) as a New Developer of Low-Cost Mass Housing Project (East Meridian Residences Barangay San Isidro, Rodriguez, Rizal) on a Non-Pioneer status under Certificate of Registration No. 2014-002 dated January 03, 2014. Extraordinary Development has been granted Income Tax Holiday (ITH) by the BOI for a period of four (4) years from January 2014 or actual start of commercial operations/selling whichever is earlier but in no case earlier than the date of registration. Extraordinary Development's East Meridian Residences Barangay San Isidro, Rodriguez, Rizal Project is registered with Housing and Land Use Regulatory Board (HLURB) under Certificate of Registration No. 24805 and holds HLURB License to Sell No. 28534; and under the Specific Terms and Conditions of its BOI Registration, the ITH of Extraordinary Development shall cover only three hundred eighty four (384) units of low-cost mass housing for East Meridian Residences Barangay San Isidro, Rodriguez, Rizal Project based on the following schedule: Year Volume (No. of Units) 1 257 2 103 3 17 4 7 Total 384 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 Extraordinary Development , 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. DSAICa 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 Extraordinary Development's East Meridian Residences Barangay San Isidro, Rodriguez, Rizal Project is a BOI registered project, this Office is of the opinion as it hereby holds, that income payments received by Extraordinary Development in connection with its housing project, East Meridian Residences Barangay San Isidro, Rodriguez, Rizal Project (on the 384 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 January 2014 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 CWT covers only income directly attributable to revenues generated from the registered activity, Extraordinary Development's East Meridian Residences Barangay San Isidro, Rodriguez, Rizal Project involving 384 low-cost mass housing units. 1 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. Moreover, the entitlement to ITH of Extraordinary Development's East Meridian Residences Barangay San Isidro, Rodriguez, Rizal Project is not automatic as it still has to comply with the following provisions of the Specific Terms and Conditions of their BOI Registration, viz. : "3. 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: DaAETS a. Net Value Added (NVA) should be at least 25% Year 1 Year 2 Year 3 Year 4 NVA 98% 98% 97% 98 b. Job Generation Pre-Op Year 1 Year 2 Year 3 Year 4 Total Employee 148 559 214 35 15 c. Investments and Timetable Activity Schedule Related Cost Expense/s (In Php'000) Land acquisition October 2007 Land cost 48,596 Secure necessary July 2012 to Pre-operating 1,569 license/permit/ December 2013 expenses registration from the government/training cost Site preparation and February 2013 Land/site 40,850 development to July 2014 development cost House construction December 2013 House 78,476 to November construction cost 2017 Start of Commercial January 2014 Working capital 9,708 Operation Total Project Cost 179,199 ====== d. Sales Revenue EDACSa Year Volume (No. of Units) Value (Php'000) 1 257 175,438 2 103 70,317 3 17 11,364 4 7 4,972 Total 384 262,091 === ====== 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. xxx xxx xxx 5. The enterprise shall maintain books of accounts for this registered project separate from all its other operation/s and/or activity/ies. 6. The enterprise shall be entitled to the following incentives: a. ITH for four (4) years from January 2014 or actual start of commercial operations/selling, whichever is earlier but in no case earlier than the date of registration. TaDAHE xxx xxx xxx a.ii. 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. xxx xxx xxx a.v. In the availment of ITH, the enterprise shall secure from the HLURB an endorsement that it has faithfully complied with the approved development plan and a "Certificate of Good Housekeeping" . xxx xxx xxx Date of Filing :An application should be filed with the BOI Incentives Service 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 by SSS that the enterprise is in good standing in the remittance of SSS contributions of its employees. ... The enterprise must secure a Certificate of ITH Entitlement (CoE) from the BOI Legal Service (LD) prior to filing of ITR with the BIR; otherwise, ITH for that particular year without CoE shall be forfeited. EHaASD xxx xxx xxx 7. In the event the enterprise fails to maintain the 75:25 debt-equity 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 at least twenty percent (20%) of the total subdivision area (estimated at 8,917 sq.m.) or total subdivision project cost (estimated at Ph35.84 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) Development of new settlement directly undertaken by registered activity; (2) Slum Upgrading; and (3) Development of a new settlement; through joint venture arrangements with either: a Local Government Unit, the National Housing Authority, a subsidiary of the BOI-registered entity, or a developer accredited by the HLURB. Otherwise, the ITH for that particular year shall be deemed forfeited. Compliance with the twenty (20%) percent 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. xxx xxx xxx 12. The enterprise must commit to the tenets of Good Corporate Governance." HTDAac 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, Extraordinary Development's East Meridian Residences Barangay San Isidro, Rodriguez, Rizal Project was clearly granted a 4-year ITH but such terms and conditions do not provide for any exemption from other taxes that Extraordinary Development may be subject to on its business transactions. Thus, Extraordinary Development's East Meridian Residences Barangay San Isidro, Rodriguez, Rizal 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 Extraordinary Development's East Meridian Residences Barangay San Isidro, Rodriguez, Rizal 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 Extraordinary Development's East Meridian Residences Barangay San Isidro, Rodriguez, Rizal 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. DcTAIH Likewise, Extraordinary Development's East Meridian Residences Barangay San Isidro, Rodriguez, Rizal 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, Extraordinary Development's East Meridian Residences Barangay San Isidro, Rodriguez, Rizal 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. Per License to Sell, specifically: Block 4-Lot 22 to 43; Block 5-Lot 14 to 50; Block 6-Lot 1 to 40; Block 7-Lot 1 to 40; Block 8-Lot 1 to 40; Block 9-Lot 1 to 35; Block 10-Lot 1 to 31; Block 11-Lot 1 to 29; Block 12-Lot 1 to 25; Block 13-Lot 1 to 19; Block 14-Lot 1 to 11; Block 15-Lot 1 to 40; Block 3-Lot 12; Block 2-Lot 1 to 4, 70, 79, 81, 83, 97, 98; Block 1-Lot 1, 14, 15 and 22. 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.