BIR Ruling No. 172-14

June 5, 2014 BIR RULING NO. 172-14 E.O. 226; RR 2-98; RR 16-11; BIR Ruling No. 546-12; BIR Ruling No. 334-11 Basic Housing Solutions, Inc. Asiatic Bldg., Phoenix Sun Business Park, E. Rodriguez Jr. Avenue, Libis, Quezon City 1110 Attention: Mr. Geoffrey Quiec Vice President-Operations Gentlemen : This refers to your letter dated January 31, 2013, requesting for the issuance of a Ruling on the tax consequences of the Income Tax Holiday (ITH) granted to BASIC HOUSING SOLUTIONS, INC. by the Board of Investments (BOI) under Executive Order (EO) No. 226 otherwise known as the "Omnibus Investments Code of 1987", for a period of four (4) years from the start of commercial operations/selling. Documents submitted disclosed that BASIC HOUSING SOLUTIONS, INC., with Taxpayer's Identification No. (TIN) 001-668-599-000, is a corporation organized and existing under Philippine laws; that it is duly registered with the Securities and Exchange Commission (SEC) under Registration No. ASO92-002873 dated April 29, 1992; that it is engaged in real estate development; that it is registered with the BOI as a New Developer of Low-Cost Mass Housing Project on a Non-Pioneer status; that it is the developer of the following mass housing project: Project Location BOI Reg. Date of BOI Start of No. of Name No. Registration Commercial Units Operation/ITH Tierra Vista Brgy. San 2012-184 August 31, August 2012 413 Pampanga Rafael, Mexico, 2012 Phase 1 Pampanga that under its BOI Terms and Conditions, the following project shall construct and sell units of low-cost mass housing units based on the following schedule: TIcEDC Project Name Year No. of Units Value (Php'000) Tierra Vista Pampanga Phase 1 1 102 76,434 2 104 82,031 3 104 86,388 4 103 90,466 Total 413 335,319 === ====== that Tierra Vista Pampanga Phase 1 located at Brgy. San Rafael, Mexico, Pampanga is registered with the Housing and Land Use Regulatory Board (HLURB) under the following Certificate of Registration and was issued License to Sell, to wit: Project Name Location HLURB Certificate HLURB License of Registration No./ to Sell No./Date Date Issued Issued Tierra Vista Brgy. San Rafael, 23807/November 24326/November Pampanga Phase 1 Mexico, 15, 2011 15, 2011 Pampanga that according to the Specific Terms and Conditions of its BOI Registration, BASIC HOUSING SOLUTIONS, INC. (Tierra Vista Pampanga Phase 1-Brgy. San Rafael, Mexico, Pampanga) is entitled to ITH for a period of four (4) years from August 2012 or the actual start of commercial operations/selling whichever is earlier, but in no case earlier than the date of registration; that BASIC HOUSING SOLUTIONS, INC. (Tierra Vista Pampanga Phase 1-Brgy. San Rafael, Mexico, Pampanga)'s ITH shall be limited only to the revenues generated from the registered project; and that revenues from units with selling price exceeding P2.50M shall not be covered by ITH. aEACcS In reply, please be informed that under Section 2.57.5 (B) (2) of Revenue Regulations 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 BASIC HOUSING SOLUTIONS, INC. (Tierra Vista Pampanga Phase 1-Brgy. San Rafael, Mexico, Pampanga) is a BOI-registered project, this Office is of the opinion that income payments received by BASIC HOUSING SOLUTIONS, INC. in connection with the sale of units in its low-cost mass housing project Tierra Vista Pampanga Phase 1-Brgy. San Rafael, Mexico, Pampanga , involving 413 low-cost mass housing 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 from August 2012 or the actual start of commercial operations whichever is earlier but in no case earlier than the date of registration. 1 It must be emphasized, however, that the above exemption from creditable withholding tax covers only income directly attributable to revenues generated from the registered activity, Tierra Vista Pampanga Phase 1-Brgy. San Rafael, Mexico, Pampanga , involving 413 low-cost mass housing units. Furthermore, such exemption shall not cover revenues from units with selling price exceeding Two Million Five Hundred Thousand Pesos. (P2,500,000.00). (BIR Ruling No. 546-12 dated August 30, 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. Moreover, the entitlement of BASIC HOUSING SOLUTIONS, INC. (Tierra Vista Pampanga Phase 1-Brgy. San Rafael, Mexico, Pampanga) to ITH is not automatic as such project has to comply with the Specific Terms and Conditions of its pertinent BOI Registration, viz. : (1) 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 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: aDSHCc a. Net Value Added should be at least 25% Year 1 Year 2 Year 3 Year 4 Total Construction 34,545 38,641 42,537 46,735 Cost (PhP'000) Cost of Raw 1,441 1,456 1,456 1,473 Materials (PhP'000) NVA (%) 96% 96% 97% 97% b. Job Generation Yr-1 Yr-2 Yr-3 Yr-4 Employees/Contractors paid on 24 24 24 24 monthly basis (Including Managers/ Supervisors) Contractors and Laborers 25 25 25 25 Total 49 49 49 49 === === === === c. Investments and Timetable Activity Schedule Related Cost (Month/Year) Expenses (Php'000) Land acquisition July 2009 Land Cost 36,475 Secure necessary September Pre-operating 3,460 license/permit/registration 2010 Expenses from the government/ training cost Site preparation and October 2010 Land/Site 35,907 development Development Building construction January 2012 Building 162,458 construction Start of Commercial August 2012 Working Capital 2,000 Operations Total Project Cost 240,300 ====== d. Sales Revenues aTAEHc Year Volume Sales Value (No. of Units) (Php'000) 1 102 76,434 2 104 82,031 3 104 86,388 4 103 90,466 Total 413 335,319 === ====== Income qualified for ITH availment shall not exceed by more than 10% of the projected income represented by the enterprise in its application provided the project's actual investments and employment match the enterprise's representations in its application. (2) Only income directly attributable to revenue generated from the registered project (Tierra Vista Pampanga Phase 1-Brgy. San Rafael, Mexico, Pampanga) shall be qualified for ITH. Revenues from units with selling price exceeding P2.50M shall not be covered by ITH. For this purpose, the enterprise shall submit audited segregated income statements for this registered project. Net income from operation of registered activity shall be certified under oath by CEO or CFO; (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 non-registered activity/ies. The methodology to be adopted in depreciation for fixed Assets particularly the Plant, Property and Equipment account shall be the Straight Line depreciation method. EADSIa (4) The interest Expense on the enterprise's liabilities shall be appropriately allocated between the registered activity/ies and the non-registered activity/ies. (5) The enterprise shall secure from HLURB an endorsement that it has faithfully complied with the approved development plan and a " Certificate of Good Housekeeping "; (6) An application should be filed with the BOI Incentives Department within one (1) month from the filing of the final ITR with 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. Any request for extension of the reckoning date of ITH availment should be filed prior to the scheduled date or within ninety (90) days from the occurrence of fortuitous events and/or government delays; (7) The enterprise must secure a Certificate of ITH Entitlement (CoE) from the BOI Supervision and Monitoring Department (SMD) prior to filing the Income Tax Return (ITR) with the Bureau of Internal Revenue (BIR), otherwise, ITH for that particular taxable year without CoE is forfeited; (8) 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 the 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; (9) The enterprise shall submit proof of compliance that at least twenty percent (20%) of the total subdivision area (estimated at 10,927 sq.m.) or total subdivision project cost (estimated at P48.06M), 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) New Settlement; (2) Slum Upgrading; and (3) Joint-Venture Projects. Otherwise, the ITH for that particular taxable year shall be deemed forfeited. TDcAaH (10) The enterprise shall ensure (a) that its contractors are duly licensed by the Philippine Contractors Accreditation Board (PCAB) as required under Republic Act No. 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 (11) 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. (12) The enterprise must abide by the principles of Good Corporate Governance. It must likewise accomplish the BOI form on self-rating Governance Scorecard every year as a requirement for ITH availment. Furthermore, BOI-registered enterprises enjoy no tax exemption/privileges other than those granted under E.O. 266. In this regard, under the terms and conditions of its BOI registration, BASIC HOUSING SOLUTIONS, INC. (Tierra Vista Pampanga Phase 1-Brgy. San Rafael, Mexico, Pampanga) was clearly granted 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, BASIC HOUSING SOLUTIONS, INC. (Tierra Vista Pampanga Phase 1-Brgy. San Rafael, Mexico, Pampanga) 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) DEAaIS 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) 2 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) 3 and below" is VAT-exempt. Thus, only the sales by BASIC HOUSING SOLUTIONS, INC. (Tierra Vista Pampanga Phase 1-Brgy. San Rafael, Mexico, Pampanga) of housing units with selling price of not more than the aforementioned price ceiling shall be exempt from VAT. It should be understood that BASIC HOUSING SOLUTIONS, INC. (Tierra Vista Pampanga Phase 1-Brgy. San Rafael, Mexico, Pampanga) 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 RR No. 2-98, as amended. Likewise, BASIC HOUSING SOLUTIONS, INC. (Tierra Vista Pampanga Phase 1-Brgy. San Rafael, Mexico, Pampanga) 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, BASIC HOUSING SOLUTIONS, INC. (Tierra Vista Pampanga Phase 1-Brgy. San Rafael, Mexico, Pampanga)'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. CETDHA 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. Effective January 1, 2012 pursuant to Revenue Regulations No. 16-2011. 3. Effective January 1, 2012 pursuant to Revenue Regulations No. 16-2011.