BIR Ruling No. 173-15

June 8, 2015 BIR RULING NO. 173-15 E.O. 226; RR 16-2011; Secs. 57 (B); 106 (A) (1) (a); 196 NIRC; BIR Ruling No. 334-11 dated-September 7, 2011 Johndorf Ventures Corporation 14th Floor Ayala Life FGU Bldg.,Mindanao Ave., Cor. Biliran Rd.,Cebu Business Park, Ayala, Cebu City Attention: Lucille Dy-Parcon Finance Manager-VisMin Gentlemen : This refers to your letter dated December 03, 2014 stating that Johndorf Ventures Corporation ( "Johndorf" for brevity) with Tax Identification No. 000-555-949-003 is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) under Company Reg. No. 137388. It is registered with the Board of Investments (BOI) as a New Developer of Low-Cost Mass Housing Project (Astana Subdivision Brgy. Calawisan, Lapu-Lapu City, Mactan) on a Non-Pioneer status under Certificate of Registration No. 2014-099 dated July 02, 2014 in accordance with the Omnibus Investments Code of 1987 or Executive Order (EO) No. 226. Johndorf has been granted Income Tax Holiday (ITH) by the BOI for a period of three (3) years from July 2014 or actual start of commercial operations/selling, whichever is earlier but in no case earlier than the date of registration. Johndorf's Astana Subdivision Brgy. Calawisan, Lapu-Lapu City, Mactan Project is registered with Housing and Land Use Regulatory Board (HLURB) under Certificate of Registration No. 25119 and holds HLURB License to Sell No. 27134; and under the Specific Terms and Conditions of its BOI Registration, Johndorf shall construct and sell four hundred thirteen (413) units of low-cost mass housing for Astana Subdivision Brgy. Calawisan, Lapu-Lapu City, Mactan Project based on the following schedule: Year Volume (No. of Units) Value (P'000) 1 100 125,000 2 200 250,000 3 80 100,000 4 33 41,250 Total 413 516,250 ==== ======= 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 Johndorf, 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. 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. TAIaHE Accordingly, since Johndorf's Astana Subdivision Brgy. Calawisan, Lapu-Lapu City, Mactan Project is a BOI-registered project, this Office is of the opinion as it hereby holds, that income payments received by Johndorf in connection with its housing project, Astana Subdivision Brgy. Calawisan, Lapu-Lapu City, Mactan (on the 413 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 three (3) years from July 2014 or actual start of commercial operations/selling, whichever is earlier but in no case earlier than the date of registration. 1 It must be emphasized, however, that the above exemption from CWT covers only income directly attributable to revenues generated from its registered activity, Johndorf's Astana Subdivision Brgy. Calawisan, Lapu-Lapu City, Mactan Project on the 413 low-cost mass housing units. 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 Johndorf's Astana Subdivision Brgy. Calawisan, Lapu-Lapu City, Mactan Project is not automatic as it still has to comply with the following provisions of the Specific Terms and Conditions of its BOI Registration, viz. : 1. 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: (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 (NVA) should be at least 25% Year 1 Year 2 NVA 59% 29% b. Employment Generation Pre-op 1 Year 1 Year 2 Year 3 Year 4 Employees 99 227 208 24 14 c. Investments and Timetable Activity Schedule Related Cost Expense/s (In Php'000) Land acquisition 2013 Land cost 40,492 Secure necessary May to Pre-operating 21,872 license/permit/ October 2013 expenses registration from the government/training cost Site preparation and May to Land/site 45,481 development December development 2013 cost Building/House Feb. 2014 to Building/House 330,400 construction Dec. 2015 Construction cost Capital Equipment None Capital Acquisition Equipment Cost Start of commercial July 2014 Working capital 10,000 operations d. Sales Revenues Year Volume (No. of Units) Value (P'000) 1 100 125,000 2 200 250,000 3 80 100,000 4 33 41,250 Total 413 516,250 ====== 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. cDHAES In cases where the project's actual revenues exceed the projections in its application due to new markets/orders; additional employment shifts, additional investments, the Board may increase the project's ITH availment proportionately. Request/s for adjustment of projected revenue must be filed before the filing of application for ITH. 2. 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. 3. Secure from the 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 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 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 Legal Service 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-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 (estimated at 3,682.4 sq.m.) or total subdivision project cost (estimated at PhP89,649,000) has been developed and allocated for socialized housing within one year from date of registration or prior to availment of ITH, whichever is earlier. This may be done through development of new settlement directly undertaken by the registered entity. Otherwise, the ITH for that particular taxable 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. 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, Johndorf's Astana Subdivision Brgy. Calawisan, Lapu-Lapu City, Mactan Project was clearly granted a 3-year ITH but such terms and conditions do not provide for any exemption from other taxes that Johndorf may be subject to on its business transactions. Thus, Johndorf's Astana Subdivision Brgy. Calawisan, Lapu-Lapu City, Mactan 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) ASEcHI 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 Johndorf's Astana Subdivision Brgy. Calawisan, Lapu-Lapu City, Mactan 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 Johndorf 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 at 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, Johndorf 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, Johndorf'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. Movement of ITH period is subject to Art. 7 of E.O. 226 per BOI Specific Terms and Conditions No. 1. 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.