BIR Ruling No. 174-15

June 8, 2015 BIR RULING NO. 174-15 E.O. 226; RR 16-2011; Secs. 57 (B); 106 (A) (1) (a); 196 NIRC; BIR Ruling No. 334-11 Liberty Land Corporation 224 J. Pacana Street, Puntod Cagayan de Oro City Attention: Rosabelle B. Villanueva General Manager Gentlemen : This refers to your letter dated February 10, 2015 stating that Liberty Land Corporation (" Liberty " for brevity) with Tax Identification No. 001-748-244-000 is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) under Company Reg. No. AS092-3093. It is registered with the Board of Investments (BOI) as a New Developer of Low-Cost Mass Housing Project (Westgate Highland Phase 3 Palalan, Lumbia, Cagayan de Oro City) on a Non-Pioneer status under Certificate of Registration No. 2014-173 dated September 26, 2014 in accordance with the Omnibus Investments Code of 1987 or Executive Order (EO) No. 226. Liberty has been granted Income Tax Holiday (ITH) by the BOI for a period of four (4) years from October 2014 or actual start of commercial operations/selling, whichever is earlier but in no case earlier than the date of registration. Liberty's Westgate Highland Phase 3 Palalan, Lumbia, Cagayan de Oro City Project is registered with Housing and Land Use Regulatory Board (HLURB) under Certificate of Registration No. 24099; and holds HLURB License to Sell No. 28414; and under the Specific Terms and Conditions of its BOI Registration, Liberty shall construct and sell two hundred fifty one (251) units of low-cost mass housing for Westgate Highland Phase 3 Palalan, Lumbia, Cagayan de Oro City Project based on the following schedule: Year Volume (No. of Units) Value (P'000) 1 83 98,050,000 2 62 62,700,000 3 58 59,300,000 4 48 50,400,000 Total 251 270,450,000 ===== ========== 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 Liberty, 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. Accordingly, since Liberty's Westgate Highland Phase 3 Palalan, Lumbia, Cagayan de Oro City Project is a BOI-registered project, this Office is of the opinion as it hereby holds, that income payments received by Liberty in connection with its housing project, Liberty's Westgate Highland Phase 3 Palalan, Lumbia, Cagayan de Oro City Project (on the 251 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 four (4) years from October 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, Liberty's Westgate Highland Phase 3 Palalan, Lumbia, Cagayan de Oro City involving 251 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. cSaATC Moreover, the entitlement to ITH of Liberty's Westgate Highland Phase 3 Palalan, Lumbia, Cagayan de Oro City 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 in this order of importance: (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 Year 3 Year 4 NVA 98% 98% 99% 98% b. Job Generation Pre-op Year 1 Year 2 Year 3 Year 4 Number of 48 167 167 167 108 Employees c. Investments and Timetable Activity Schedule Related Cost Expense/s (In Php) Land Acquisition January 2013 Land cost 15,684,000 Secure necessary Pre-operating 248,209 license/permit/registration June 2013 - expenses from the March 2014 government/training costs Site Preparation and March 2014 - Land/site 38,717,732 Development March 2017 development cost Building/House July 2014 - Building/ 55,060,420 Construction July 2017 House construction cost Start of Commercial October 2014 Working Operation capital Total Project Cost 109,710,361 ======== d. Sales Revenues Year Volume (No. of Value (Php) Units) 1 83 98,050,000 2 62 62,700,000 3 58 59,300,000 4 48 50,400,000 Total 251 270,450,000 ========== 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. 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 a list of common cost items and cost allocation methodology for its other projects/activities (whether BOI-registered or non-registered) and the methodology adopted in allocating the common costs between the registered 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 (LS) prior to filing of ITR with the BIR; otherwise, ITH for that particular taxable year without CoE shall be forfeited. cHDAIS 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 10,416.56 sq.m.) or total subdivision project cost (estimated at PhP21.94M) 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 the development of new settlement directly undertaken by the registered entity. Otherwise, the ITH for that particular year shall be deemed forfeited. 8. 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, Liberty's Westgate Highland Phase 3 Palalan, Lumbia, Cagayan de Oro City Project was clearly granted a 4-year ITH but such terms and conditions do not provide for any exemption from other taxes that Liberty may be subject to on its business transactions. Thus, Liberty's Westgate Highland Phase 3 Palalan, Lumbia, Cagayan de Oro City 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) 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 Liberty's Westgate Highland Phase 3 Palalan, Lumbia, Cagayan de Oro City 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 Liberty's Westgate Highland Phase 3 Palalan, Lumbia, Cagayan de Oro City Project 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, Liberty's Westgate Highland Phase 3 Palalan, Lumbia, Cagayan de Oro City Project 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, Liberty's Westgate Highland Phase 3 Palalan, Lumbia, Cagayan de Oro City Project'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.