BIR Ruling No. 173-14

June 5, 2014 BIR RULING NO. 173-14 E.O. 226; RR 2-98; RR 16-11; BIR Ruling No. 546-12; BIR Ruling No. 334-11 Axeia Development Corporation Blk-4 Lot-87 Ph-1B Alta Tierra Homes, Brgy. A. Olaes, Gen. Mariano Alvarez (GMA), Cavite 4117 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 AXEIA DEVELOPMENT CORPORATION 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 AXEIA DEVELOPMENT CORPORATION with Taxpayer's Identification No. (TIN) 000-436-566-000, is a corporation organized and existing under Philippine laws; that it is duly registered with the Securities and Exchange Commission (SEC) under Registration No. 41642 dated July 7, 1970; 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. Name No. Registration Commercial of Operation/ Units ITH Valle Verde Brgy. Langkaan II, 2012-224 October 22, October 566 Dasmarias Dasmarias, 2012 2012 Phase 1 Cavite 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: cAHDES Project Name Year No. of Units Value (Php'000) Valle Verde Dasmarias Phase 1 1 141 136,747 2 143 146,465 3 143 153,681 4 139 155,556 Total 566 592,449 ==== ====== that Valle Verde Dasmarias Phase 1 located at Brgy. Langkaan II, Dasmarias, Cavite 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 HLURB License Certificate of to Sell No./Date Registration No./ Issued Date Issued Valle Verde Brgy. Langkaan II, 23667/February 28, 25541/February Dasmarias Phase Dasmarias, 2012 28, 2012 1 Cavite that according to the Specific Terms and Conditions of its BOI Registration, AXEIA DEVELOPMENT CORPORATION (Valle Verde Dasmarias Phase 1-Brgy. Langkaan II, Dasmarias, Cavite) is entitled to ITH for a period of four (4) years from October 2012 or the actual start of commercial operations/selling whichever is earlier, but in no case earlier than the date of registration; that AXEIA DEVELOPMENT CORPORATION (Valle Verde Dasmarias Phase 1-Brgy. Langkaan II, Dasmarias, Cavite)'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. 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 AXEIA DEVELOPMENT CORPORATION (Valle Verde Dasmarias Phase 1-Brgy. Langkaan II, Dasmarias, Cavite) is a BOI-registered project, this Office is of the opinion that income payments received by AXEIA DEVELOPMENT CORPORATION in connection with the sale of units in its low-cost mass housing project Valle Verde Dasmarias Phase 1-Brgy. Langkaan II, Dasmarias, Cavite , involving 566 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 October 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, Valle Verde Dasmarias Phase 1-Brgy. Langkaan II, Dasmarias, Cavite , involving 566 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) DHcSIT 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 AXEIA DEVELOPMENT CORPORATION (Valle Verde Dasmarias Phase 1-Brgy. Langkaan II, Dasmarias, Cavite) to ITH is not automatic as such project has to comply with the Specific Terms and Condition of its pertinent BOI Registration, viz. : (1) The enterprise shall submit proof of verified compliance with the socialized housing requirement for its four (4) housing projects: Alta Tierra Homes Phase 1 (registered under the 2007 IPP), Tierra Vista Homes Dasmarias Phase 1 (registered under the 2009 IPP), Townsville-Sto. Tomas Phase 2 (registered under the 2010 IPP) and Alta Tierra Homes Phase 2B (registered under the 2010 IPP), prior ITH availment and to be completed within the ITH entitlement period. Compliance with the 20% socialized housing requirement should be proportionate to the number of low-cost mass housing units being applied for ITH for the taxable year, e.g. , if total registered units is 300 and 100% is sold by the first year of availment, then the 20% socialized housing requirement for the 300 units should be met by the first year. (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 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: a. Net Value Added should be at least 25% Year 0 Year 1 Year 2 Year 3 Total Construction 37,611 42,240 46,519 49,458 Cost (PhP'000) Cost of Raw 1,268 1,307 1,307 1,254 Materials (PhP'000) NVA (%) 97% 97% 97% 97% b. Job Generation HIaTCc Yr-1 Yr-2 Yr-3 Yr-4 Employees paid on monthly basis 16 16 16 16 Full-time workers paid by 25 25 25 25 contractors Others (Managers and 8 8 8 8 Supervisors) Total 49 49 49 49 === === === === c. Investments and Timetable Activity Schedule Related Cost (Month/Year) Expenses (Php'000) Land acquisition April 2010 Land Cost 115,802 Secure necessary February 2012 Pre-operating 5,820 license/permit/ Expenses registration from the government/training cost Site preparation and March 2011 to Land/Site 41,213 development March 2016 Development Cost House Construction July 2012 to House 175,828 March 2016 Construction Cost Capital equipment March 2011 Capital 1,000 acquisition Equipment cost Start of Commercial October 2012 Working Capital 2,000 Operations Total Project Cost 341,662 ====== d. Sales Revenues HEaCcD Year Volume Sales Value (No. of Units) (Php) 1 141 136,747 2 143 146,465 3 143 153,681 4 139 155,556 Total 566 592,449 === ====== 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. (3) Only income directly attributable to revenue generated from the registered project (Valle Verde Dasmarias Phase 1-Brgy. Langkaan II, Dasmarias, Cavite) 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; (4) 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; DHIETc (5) The Interest Expense on the enterprise's liabilities shall be appropriately allocated between the registered activity/ies and the non-registered activity/ies. (6) The enterprise shall secure from HLURB an endorsement that it has faithfully complied with the approved development plan and a "Certificate of Good Housekeeping" ; (7) 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; (8) 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; (9) 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; AICDSa (10) The enterprise shall submit proof of compliance that at least twenty percent (20%) of the total subdivision area (estimated at 11,614 sq.m.) or total subdivision project cost (estimated at P68.332M), 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. (11) 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; (12) 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 (13) 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, AXEIA DEVELOPMENT CORPORATION (Valle Verde Dasmarias Phase 1-Brgy. Langkaan II, Dasmarias, Cavite) 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, AXEIA DEVELOPMENT CORPORATION (Valle Verde Dasmarias Phase 1-Brgy. Langkaan II, Dasmarias, Cavite) 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) IcEACH 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 AXEIA DEVELOPMENT CORPORATION (Valle Verde Dasmarias Phase 1-Brgy. Langkaan II, Dasmarias, Cavite) of housing units with selling price of not more than the aforementioned price ceiling shall be exempt from VAT. It should be understood that AXEIA DEVELOPMENT CORPORATION (Valle Verde Dasmarias Phase 1-Brgy. Langkaan II, Dasmarias, Cavite) 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, AXEIA DEVELOPMENT CORPORATION (Valle Verde Dasmarias Phase 1-Brgy. Langkaan II, Dasmarias, Cavite) 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, AXEIA DEVELOPMENT CORPORATION (Valle Verde Dasmarias Phase 1-Brgy. Langkaan II, Dasmarias, Cavite)'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. IHTaCE 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.