BIR Ruling No. 170-15

June 8, 2015 BIR RULING NO. 170-15 E.O. 226; Secs. 57 (B); 106 (A) (1) (a);196 NIRC; BIR Ruling No. 412-13 Moderno Citihomes Development Corporation 2nd Flr. Gravador Bldg. corner Sacred Heart Rizal Avenue, Digos City Davao del Sur Attention: Christopher C. Go Financial Control Group Head Gentlemen : This refers to your letter dated February 13, 2015 requesting on behalf of Moderno Citihomes Development Corporation ("Moderno Citihomes") , certificate of exemption from income and expanded withholding taxes on its income derived from the housing project, Citta Di Oro , a duly registered project with the Board of Investments (BOI) under Executive Order No. 226, otherwise known as the "Omnibus Investments Code of 1987". Documents submitted show that Moderno Citihomes , with Tax Identification No. (TIN) 008-617-011-000, is a domestic corporation duly organized under the Philippine laws and registered with the Securities and Exchange Commission (SEC) bearing SEC Certificate of Registration No. CS201317716; that Moderno Citihomes , as a New Developer of a Low-Cost Mass Housing Project: Citta Di Oro-Sugar Road and Parallel Street, Brgy. Tres De Mayo, Digos City, Davao Del Sur , is duly registered with the Board of Investments (BOI) under the Omnibus Investments Code of 1987 (E.O. 226), under BOI Certificate of Registration No. 2015-009; that pursuant to said BOI Certificate of Registration, Moderno Citihomes shall be entitled to income tax holiday (ITH) for the aforesaid project for a period of four (4) years beginning from January 2015 or actual start of commercial operations/selling, whichever is earlier, but in no case earlier than the date of registration; that the project is duly registered with the Housing and Land Use Regulatory Board (HLURB) under Certificate of Registration No. 26170 and License to Sell No. 029348 pursuant to Batas Pambansa 220; and that the ITH of the Corporation shall be limited only to the revenue generated from the registered housing project, Citta Di Oro-Sugar Road and Parallel Street, Brgy. Tres De Mayo, Digos City, Davao Del Sur. It is further shown that Moderno Citihomes , under the Specific Terms and Conditions of its BOI Registration for the project, Citta Di Oro-Sugar Road and Parallel Street, Brgy. Tres De Mayo, Digos City, Davao Del Sur , is obligated to construct and sell Two Hundred Seventy Two (272) low-cost mass housing units based on the following prices and schedules: Name of Project Year Volume Value (P'000) (No. of Units) 1. Citta Di Oro 1 50 59,586 2 127 147,668 3 95 111,542 Total 272 318,796 ==== ======= 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. (BIR Ruling No. 412-13 dated November 11, 2013) Accordingly, since Citta Di Oro-Sugar Road and Parallel Street, Brgy. Tres De Mayo, Digos City, Davao Del Sur , is duly registered with the BOI under the Omnibus Investments Code of 1987, this Office is of the opinion as it hereby holds, that the income payments received by Moderno Citihomes in connection with the aforementioned housing project, consisting of Two Hundred Seventy Two (272) 1 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 four (4) years beginning from January 2015 or actual start of commercial operations/selling, whichever is earlier, but in no case earlier than the date of registration of the housing project with the BOI. It must be emphasized, however, that the aforesaid exemption from the creditable withholding tax covers only the income directly attributable to the revenues generated from the project, Citta Di Oro-Sugar Road and Parallel Street, Brgy. Tres De Mayo, Digos City, Davao Del Sur , consisting of Two Hundred Seventy Two (272) units. Furthermore, such exemption shall not cover revenues from economic housing units with selling price exceeding One Million Two Hundred Fifty Thousand Pesos (P1,250,000.00). 2 The following lots are identified as economic housing units: aScITE Block Nos. Lot Nos. No. of Lots Area (sq.m.) 1 1 to 10 10 1,295.00 2 1 to 8 8 1,064.00 3 1 to 16 16 2,122.00 4 1 to 16 16 2,115.00 5 1 to 16 16 2,109.00 6 1 to 16 16 2,103.00 7 1 to 24 24 2,872.00 8 1 to 24 24 2,872.00 9 1 to 24 24 2,872.00 10 1 to 15 15 1,800.00 11 1 to 5 5 671.00 12 1 to 18 18 2,133.00 13 1 to 18 18 2,297.00 14 1 to 20 20 2,463.00 15 1 to 11 11 1,320.00 16 1 to 28 28 3,402.00 18 1, 3 & 5 3 409.00 Total 272 33,919.00 ==== ========= Likewise, the tax exemption shall not cover revenues from the sale of socialized housing units with selling price exceeding Four Hundred Fifty Thousand Pesos (P450,000.00). 3 The following lots are identified as socialized housing units: Block Nos. Lot Nos. No. of Area (sq.m.) Lots 11 6 to 22 17 1,229.00 17 1 to 19 19 1,410.00 18 2, 4 & 6 to 25 22 1,634.00 19 1 to 21 21 1,547.00 20 1 to 13 13 1,050.00 21 1 to 7 7 574.00 Total 99 7,444.00 ==== ======== In the computation of ITH, interest income from in-house financing shall not be considered as part of the revenues generated from the registered housing project. Moreover, Moderno Citihomes' entitlement to ITH for its BOI-registered housing project is not automatic as it has still to comply with the provisions of the Specific Terms and Conditions of its BOI Registration, viz. : (1) The enterprise shall increase its Stockholders Equity to at least P53,387,500 equivalent to 25% of the total project cost and shall submit proof of compliance before availment of ITH. (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: (1) 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: a. Net Value Added should be at least 25% Year 1 Year 2 Year 3 NVA (%) 97% 97% 97% b. Job Generation Year 1 Year 2 Year 3 Employees 211 261 231 c. Investments and Timetable Activity Schedule Related Cost (In (Month/Year) Expenses Php'000) Land Acquisition January 2014 Land Cost 10,720 Secure necessary January Pre-Operating 1,000 license/permit/ 2014- Expenses registration from the October 2014 government/training costs Site Preparation and January 2014 Land/Site 46,930 Development to December Development 2014 Cost Building/House January 2015 Building/ 149,600 Construction to December House 2018 Construction Cost Start of Commercial January 2015 Working 5,300 Operations Capital Total Project Cost 213,550 ======= d. Sales Revenues Year Volume (No. of Units) Value (P'000) 1 50 59,586 2 127 147,668 3 95 111,542 Total 272 318,796 ==== ======= Net income qualified for ITH availment shall not be a result of gross revenues exceeding 10% of the projected gross revenue represented by the firm in its application. (3) 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"; (4) 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; (5) 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 taxable year without CoE shall be forfeited; (6) In the event the enterprise fails to maintain the 75:25 debt-to-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; (7) The enterprise shall submit proof of compliance that, at least twenty percent (20%) of the total subdivision area (12,830.4 sq.m.) or total subdivision project cost (estimated at Php42,710,000) 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 taxable year shall be deemed forfeited; (8) The enterprise shall submit to the BOI Supervision and Monitoring Department, on a semestral basis within fifteen (15) days from the end of each semester, a report on actual investments, employment, sales, production costs and other information that the Board may require at any given time with respect to the registered project; and (9) The enterprise must commit to the tenets of Good Corporate Governance. 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, Moderno Citihomes was clearly granted a 4-year ITH for its project, Citta Di Oro-Sugar Road and Parallel Street, Brgy. Tres De Mayo, Digos City, Davao Del Sur , consisting of Two Hundred Seventy Two (272) units, 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, Moderno Citihomes-Citta Di Oro-Sugar Road and Parallel Street, Brgy. Tres De Mayo, Digos City, Davao Del Sur 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. 412-13 dated November 11, 2013) 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) 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) and below, is VAT-exempt. 4 Thus, only the sales by Moderno Citihomes-Citta Di Oro-Sugar Road and Parallel Street, Brgy. Tres De Mayo, Digos City, Davao Del Sur of housing units with selling price of not more than the aforementioned price ceiling shall be exempt from VAT. It should be understood that Moderno Citihomes 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 (RR) No. 2-98 , as amended. Likewise, Moderno Citihomes 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, Moderno Citihomes' 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 is 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. The HLURB License No. 029348 covers 371 units. However, the BOI Registration covers only 272 units. Thus, the tax exemption shall cover only the 272 housing units. 2. Per HLURB License to Sell No. 029348, the selling price of the Project's economic house and lot packages shall have a maximum selling price of P1,250,000.00. Thus, the tax exemption shall only cover revenues from economic housing units which are sold not more than P1,250,000.00 3. Per HLURB License to Sell No. 029348, the selling price of the Project's socialized house and lot packages shall have a maximum selling price of P450,000.00. Thus, the tax exemption shall only cover revenues from socialized housing units which are sold not more than P450,000.00. 4. The increase in the threshold amounts 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.