BIR Ruling No. 172-12

March 9, 2012 BIR RULING NO. 172-12 E.O. 226; Secs. 57 (B); 106 (A) (1) (a); 109 (1) (P); 196 NIRC; BIR Ruling No. 334-2011 Deca Homes Grandvale Residences Subdivision c/o LYRR Realty Development Corporation Door 3 Nagaland Hotel, E. Angeles St. Naga City Attention: Cherry T. Rocha Vice President-Finance Gentlemen : This refers to your letter dated March 9, 2011, requesting on behalf of LYRR Realty Development Corporation's housing project, Deca Homes Grandvale Residences Subdivision-San Felipe, Naga City, Camarines Sur ("LYRR-Deca Homes"), for exemption from income and creditable withholding taxes pursuant to Revenue Regulations No. 2-98, as amended, on account of the housing project's registration with the Board of Investments (BOI) under Executive Order No. 226, otherwise known as the "Omnibus Investments Code of 1987". Documents submitted show that LYRR Realty Development Corporation, ("LYRR") with Tax Identification Number (TIN) 006-832-191-000, is a Philippine corporation engaged in real estate business and registered with the Securities and Exchange Commission under Reg. No. CS200731859 dated December 7, 2007; that LYRR is the owner of the LYRR-Deca Homes located at San Felipe, Naga City, Camarines Sur; that LYRR-Deca Homes is duly registered with the Board of Investments (BOI) under Certificate of Registration No. 2011-028, dated January 26, 2011, as New Developer of Low Cost Mass Housing Project, (LYRR-Deca Homes) on a non-pioneer status; that it shall construct and sell Five Hundred Five (505) units of low-cost mass housing based on the following schedule: Year Volume (Units) Value 1 126 Php118,125.00 2 126 118,125.00 3 126 118,125.00 4 127 119,000.00 Total 505 Php473,165.00 ===== ============ that it shall be entitled to income tax holiday (ITH) for a period of four (4) years from January 2011 or actual start of commercial operations/selling, whichever is earlier, but in no case earlier than the date of registration; and that the ITH shall be limited only to the revenue generated from its registered activity (LYRR-Deca Homes) . IASTDE 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 the Omnibus Investments Code of 1987. Accordingly, since LYRR-Deca Homes, is a BOI registered project, this Office is of the opinion as it hereby holds, that income payments received by LYRR in connection with the aforementioned housing project, LYRR-Deca Homes, 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 years starting from January 2011 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 revenues generated from the registered activity, LYRR-Deca Homes. Furthermore, such exemption shall not cover revenues from units with selling price exceeding Three Million pesos (P3,000,000.00). (BIR Ruling No. 334-2011 dated September 7, 2011) Moreover, LYRR-Deca Homes' entitlement to ITH is not automatic as it has still to comply with Sections 10 (a), 11, 12, 13, 14 and 15 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 Incentives 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; CHIEDS (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 taxable 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 shall be required to refund any capital equipment incentives availed of; (5) Prior to availment of ITH and subject to HLURB certification, the enterprise shall submit proof of compliance that at least twenty percent (20%) of the total subdivision area or total subdivision project cost, at the option of the developer, has been developed and allocated for socialized housing within or outside the same city or municipality. This may be done through any of the following modes: (1) New Settlement; (2) Slum Upgrading; and (3) Joint-Venture Projects. Otherwise, the ITH for that particular 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; (7) The enterprise shall be subject to the provisions of Revenue Regulations (RR) No. 1-2010 amending Section 3 of RR No. 9-2001, as last amended by RR No. 10-2007; and (8) 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, Production Costs, and other information that the Board may require at anytime with respect to the registered project starting on date of registration. aSECAD 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, LYRR-Deca Homes was clearly granted a 4-year ITH but such terms and conditions do not provide for any exemption from other taxes that it may be subject to on its business transactions. Thus, LYRR 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. 334-2011 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) 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. 1 Thus, only the sales by LYRR of housing units with selling price of not more than the aforementioned price ceiling shall be exempt from VAT. It should be understood that LYRR 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, LYRR is required to file on or before the 15th day of the fourth month following the close of your accounting period a Profit and Loss Statement and Balance Sheet with the Annual Information Return under oath, stating your gross income and expenses incurred during the taxable year. Finally, LYRR'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 you have been complying with the conditions under which you have been granted tax exemption or tax incentives and your tax liability, if any, pursuant to Section 235 of the Tax Code of 1997, as amended. HIAEcT 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 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.