BIR Ruling No. 177-15

June 8, 2015 BIR RULING NO. 177-15 E.O. 226; RR 16-2011; Secs. 57 (B); 106 (A) (1) (a); 196 NIRC; BIR Ruling No. 334-11 Household Development Corporation 3rd Level Starmall Bldg., CV Starr Avenue Philamlife Village, Las Pias City Attention: Atty. Cecilia A. Ramilo Tax Department Head Gentlemen : This refers to your letter dated February 04, 2013 stating that Household Development Corporation (Household for brevity) with Tax Identification No. 001-221-703-000 is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) under Company Reg. No. 75257. It is registered with the Board of Investments (BOI) as an Expanding Developer of Low-Cost Mass Housing Project (Pristina Expansion Brgy. Buhay na Tubig, Imus, Cavite) on a Non-Pioneer status under Certificate of Registration No. 2013-031 dated January 30, 2013. Household has been granted Income Tax Holiday (ITH) by the BOI for a period of three (3) years from January 2013 or actual start of commercial operations/selling, whichever is earlier but in no case earlier than the date of registration. Household's Pristina Expansion Brgy. Buhay na Tubig, Imus, Cavite Project is registered with Housing and Land Use Regulatory Board (HLURB) under Certificate of Registration No. 25577; and holds HLURB License to Sell No. 28808 and that under the Specific Terms and Conditions of its BOI Registration, Household shall construct and sell three hundred seventy seven (377) units of low-cost mass housing for Pristina Expansion Brgy. Buhay na Tubig, Imus, Cavite Project based on the following schedule: Year Volume (No. of Units) 1 98 2 165 3 114 Total 377 ===== 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 Household, 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 Household's Pristina Expansion Brgy. Buhay na Tubig, Imus, Cavite Project is a BOI registered project, this Office is of the opinion as it hereby holds, that income payments received by Household in connection with its housing project, Pristina Expansion Brgy. Buhay na Tubig, Imus, Cavite Project (on the 377 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 3 years from January 2013 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 CWT covers only income directly attributable to revenues generated from the registered activity, Household's Pristina Expansion Brgy. Buhay na Tubig, Imus, Cavite Project involving 377 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. Household's Pristina Expansion Brgy. Buhay na Tubig, Imus, Cavite Project's HLURB License to Sell No. 28808 covers 377 lots/units and provides for maximum selling price of Php1,250,000.00 per House and Lot Package. CAIHTE Moreover, the entitlement to ITH of Household's Pristina Expansion Brgy. Buhay na Tubig, Imus, Cavite Project is not automatic as it still has to comply with the following provisions of the Specific Terms and Conditions of their 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 entitlement 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% Ave. Y1 Y2 NVA 97.48% 97.48% 97.48% b. Job Generation Number of Employees Pre-op Year 1 Year 2 Year 3 Total Employees 2 77 132 90 c. Investments and Timetable Activity Schedule Related Cost Expense/s (In Php'000) Land acquisition September Land cost 64,507 2011 Secure necessary February Pre- 3,852 license/permit/registration 2012 to operating from the December expenses government/training costs 2012 Site preparation and October Land/Site 40,183 development 2012 to development November 2015 House Construction October House 132,796 2012 to construction September 2016 Capital Equipment - - - Start of Commercial January Working 6,070 Operations 2013 Capital Total Project Cost 247,410 ======= d. Sales Revenues Year Volume (No. of Units) Value (P'000) 1 98 124,976 2 165 210,045 3 114 145,244 Total 377 480,265 ===== ======= Net income that exceeds 10% of the revenue represented at the time of application shall not be eligible to ITH unless, the Board is informed in writing by the proponent in advance before the revenue is expected to exceed the projections in the application for registration submitted to the Board. 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). 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 Department 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 Supervision and Monitoring Department prior to filing of ITR with the BIR; otherwise, ITH for that particular 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 6,456.4 sq.m.) or total subdivision project cost (estimated at Php48.482M) 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: The investment scheme may be complied with through any of the following modes: (1) New settlement; (2) Slum Upgrading; and (3) Joint Venture Projects. Otherwise, ITH for that particular year shall be deemed forfeited. DETACa 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. 8. The enterprise must abide by the principles 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, Household's Pristina Expansion Brgy. Buhay na Tubig, Imus, Cavite Project was clearly granted a 3-year ITH but such terms and conditions do not provide for any exemption from other taxes that Household may be subject to on its business transactions. Thus, Household's Pristina Expansion Brgy. Buhay na Tubig, Imus, Cavite 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 Household's Pristina Expansion Brgy. Buhay na Tubig, Imus, Cavite 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 Household's Pristina Expansion Brgy. Buhay na Tubig, Imus, Cavite 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 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, Household's Pristina Expansion Brgy. Buhay na Tubig, Imus, Cavite 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, Household's Pristina Expansion Brgy. Buhay na Tubig, Imus, Cavite 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. ETHIDa Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Note from the Publisher: Missing footnote reference and text. 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.