BIR Ruling No. 180-15

June 8, 2015 BIR RULING NO. 180-15 E.O. 226; RR 16-2011; Secs. 57 (B); 106 (A) (1) (a); 196 NIRC; BIR Ruling No. 334-11 Communities Davao, Inc. Mezzanine Floor, Starmall Complex EDSA cor. Shaw Blvd., Mandaluyong City Attention: Atty. Cecilia A. Ramilo Tax Department Head Gentlemen : This refers to your letter dated November 22, 2012 stating that Communities Davao, Inc. (Communities for brevity) with Tax Identification No. 004-740-210-000 is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) under Company Reg. No. ASO95-09116. It is registered with the Board of Investments (BOI) as a New Developer of Low-Cost Mass Housing Project (Camella Tagum 2 & 3 Visayan Village, Tagum City, Davao del Norte) on a Non-Pioneer status under Certificate of Registration No. 2012-134 dated July 19, 2012. Communities has been granted Income Tax Holiday (ITH) by the BOI for a period of four (4) years from July 2012 or actual start of commercial operations/selling, whichever is earlier but in no case earlier than the date of registration. Communities' Camella Tagum 2 & 3 Visayan Village, Tagum City, Davao del Norte Project is registered with Housing and Land Use Regulatory Board (HLURB) under Certificate of Registration Nos. 23255 and 23256; and holds HLURB License to Sell Nos. 24071 1 and 24072; 2 and that under the Specific Terms and Conditions of its BOI Registration, the ITH of Communities shall cover only seven hundred sixty five (765) units of low-cost mass housing for Camella Tagum 2 & 3 Visayan Village, Tagum City, Davao del Norte Project based on the following schedule: Year Volume (No. of Units) 1 115 2 176 3 268 4 206 Total 765 ==== 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 Communities, 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 Communities' Camella Tagum 2 & 3 Visayan Village, Tagum City, Davao del Norte Project is a BOI registered project, this Office is of the opinion as it hereby holds, that income payments received by Communities in connection with its housing project, Camella Tagum 2 & 3 Visayan Village, Tagum City, Davao del Norte Project (on the 765 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 4 years from July 2012 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, Communities' Camella Tagum 2 & 3 Visayan Village, Tagum City, Davao del Norte Project involving 765 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). However, pursuant to HLURB License to Sell No. 24072, the maximum selling price of units in Camella Tagum Phase 3 shall be P1,250,000.00 per House and Lot package. 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 Communities' Camella Tagum 2 & 3 Visayan Village, Tagum City, Davao del Norte 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. : CAIHTE 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. In the event that the registered enterprise fails to implement the projects 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 following: a. Net Value Added (NVA) should be at least 25% Y1 Y2 Y3 Y4 NVA 98% 98% 98% 98% b. Job Generation Year 1 Year 2 Year 3 Year 4 Employees 132 200 301 234 c. Investments and Timetable Activity Schedule Related Cost Expense/s (In Php'000) Land acquisition July 2011 Land cost 49,719 Secure necessary October Pre- 5.003 license/permit/registration 2011 to July operating from the 2012 expenses government/training costs Site preparation and January Land/site 127,103 development 2012 to development September cost 2015 House construction March 2012 Building 313,920 to construction November 2015 Start of Commercial July Working 5,000 Operations 2012 capital Total Project 500,745 Cost ======= d. Sales Revenues Year Volume (No. of Units) Value (P'000) 1 115 151,416 2 176 232,439 3 268 350,654 4 206 270,478 Total 765 1,004,987 ==== ======== 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. In cases where the project's actual revenues exceed the projections in its application by more than 10%, the Board may increase the project's ITH availment proportionately for reasons such as but not limited to (a) additional investments; (b) new markets/orders; (c) additional employment and/or increase in number of working shifts. Request/s for adjustment of projected income may be submitted to the Board within the ITH entitlement period. 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 20,771.40 sq.m.) or total subdivision project cost (estimated at PhP100.149 M) 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 year shall be deemed forfeited. 8. 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. 226. In this regard, under the terms and conditions of its BOI registration, Communities' Camella Tagum 2 & 3 Visayan Village, Tagum City, Davao del Norte Project was clearly granted a 4-year ITH but such terms and conditions do not provide for any exemption from other taxes that Communities may be subject to on its business transactions. Thus, Communities' Camella Tagum 2 & 3 Visayan Village, Tagum City, Davao del Norte 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. 3 Thus, only the sales by Communities' Camella Tagum 2 & 3 Visayan Village, Tagum City, Davao del Norte Project housing units with selling price of not more than the aforementioned price ceilings shall be exempt from VAT. DETACa It should be understood that Communities' Camella Tagum 2 & 3 Visayan Village, Tagum City, Davao del Norte 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, Communities' Camella Tagum 2 & 3 Visayan Village, Tagum City, Davao del Norte 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, Communities' Camella Tagum 2 & 3 Visayan Village, Tagum City, Davao del Norte 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. Tagum Phase 2 covers Blk 1, lots 1-18; Blk 2, lots 1-27; Blk 3, lots 1-21; Blk 4, lots 1-21; Blk 5, lots 1-21; Blk 6, lots 1-21; Blk 7, lots 1-21, Blk 8, lots 1-21; Blk 9, lots 1-30; Blk 10, lots 1-19; Blk 11, lots 1-19; Blk 12, lots 1-28 = 267 saleable lots. 2. Tagum Phase 3 covers Blk 13, lots 1-41; Blk 14, lots 1-35; Blk 15, lots 1-122; Blk 16, lots 1-86; Blk 17, lots 1-24; Blk 18, lots 1-24; Blk 19, lots 1-56; Blk 20, lots 1-116; Blk 21, lots 1-38; Blk 22, lots 1-45 = 587 saleable lots. 3. 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.