Communities Batangas, Inc.

May 17, 2016 BIR RULING NO. 195-16 E.O. 226; RR 16-2011; Secs. 57 (B); 106 (A) (1) (a); 196 NIRC; BIR Ruling No. 334-11 Communities Batangas, Inc. 3rd Level Starmall Las Pias, C.V. Starr Avenue Philamlife Village, Pamplona, Las Pias City Attention: Atty. Cecilia A. Ramilo Tax Department Head Gentlemen : This refers to your letter dated September 17, 2014 stating that Communities Batangas, Inc. ('Communities Batangas' for brevity) with Tax Identification No. 004-525-999-000 is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) under Company Reg. No. A1996-01106. It is registered with the Board of Investments (BOI) as an Expanding Developer of Low-Cost Mass Housing Project (Pine Grove-Barangays Cumba and Mabini, Lipa City) on a Non-Pioneer status under Certificate of Registration No. 2014-156 dated September 16, 2014. Communities Batangas has been granted Income Tax Holiday (ITH) by the BOI for a period of three (3) years from September 2014 or actual start of commercial operations/selling, whichever is earlier but in no case earlier than the date of registration. Communities Batangas' Pine Grove-Barangays Cumba and Mabini, Lipa City Project is registered with Housing and Land Use Regulatory Board (HLURB) under Certificate of Registrations No. 25256; holds HLURB License to Sell No. 28308; and under the Specific Terms and Conditions of its BOI Registration, Communities Batangas shall construct and sell one hundred twenty two (122) units of low-cost mass housing for Communities Batangas' Pine Grove-Barangays Cumba and Mabini, Lipa City Project based on the following schedule: Year Volume (No. of Units) Value (P'000) 1 32 54,581 2 53 90,440 3 37 62,115 Total 122 207,136 ====== 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 Batangas, 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 Batangas' Pine Grove-Barangays Cumba and Mabini, Lipa City Project is a BOI registered project, this Office is of the opinion as it hereby holds, that income payments received by Communities Batangas in connection with its housing project, Pine Grove-Barangays Cumba and Mabini, Lipa City Project (on the 122 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 September 2014 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 its registered activity, Communities Batangas' Pine Grove-Barangays Cumba and Mabini, Lipa City Project involving 122 low-cost mass housing units used solely for family home or dwelling purposes and not for commercial purposes such as leasing, retail stores, offices, etc. 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 Communities Batangas' Pine Grove-Barangays Cumba and Mabini, Lipa City Project is not automatic as it still has to comply with the provisions of the Specific Terms and Conditions of its BOI Registration, viz. : 1. The enterprise shall submit a duly notarized Affidavit executed by a licensed engineer or architect indicating the area or the number of lots and actual units built and the construction costs on the development of the compliance project for C.R. No. 2011-189 upon ITH application. 2. The enterprise shall submit proof of verified compliance with the 20% socialized housing requirement for its existing project C.R. No. 2011-189 before availment of ITH. Compliance with the 20% socialized housing requirement should be proportionate to the number of low cost housing units being applied for ITH for the taxable year. 3. 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: (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 NVA 98% 98% 98% b. Job Generation Number of Employees Number of Pre-op Year 1 Year 2 Year 3 Employees 2 35 60 40 c. Investments and Timetable Activity Schedule Related Cost Expense/s (In PhP'000) Land Acquisition June 2012 to Land Cost 5,433 May 2014 Secure necessary March 2013 to Pre- 3,118 license/permit/registration December 2013 operating from the expenses government/training cost Site preparation and September 2013 Land/Site 25,814 development to January 2016 Development Cost House Construction October 2013 to House 69,496 August 2016 construction Cost Start of Commercial September 2014 Working 5,000 Operations Capital Total Project Cost 108,861 ====== d. Sales Revenues Year Volume (No. of Units) Value (PhP'000) 1 32 54,581 2 53 90,440 3 37 62,115 Total 122 207,136 === ====== 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. cSEDTC In cases where the project's actual revenues exceed the projections in its application due to e.g. , 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. 4. The enterprise shall submit a list of cost items common to all its projects/activities (whether BOI-registered or non-registered) and methodology adopted in allocating the common costs between the registered and non-registered activity/ies. 5. Secure from the HLURB an endorsement that it has faithfully complied with the approved development plan and a "Certificate of Good Housekeeping". 6. 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. 7. 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 year without CoE shall be forfeited. 8. 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. 9. The enterprise shall submit proof of compliance that at least twenty percent (20%) of the total subdivision area (estimated at 3,950 sq.m.) or total subdivision project cost (estimated at P21.772 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 will be done through any of the following modes: (1) Development of new settlement directly undertaken by registered activity; (2) Slum Upgrading; and (3) Development of a new settlement through joint venture arrangements with either: a Local Government Unit, the National Housing Authority, a subsidiary of the BOI-registered entity, or a developer accredited by the HLURB. 10. 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, Communities Batangas' Pine Grove-Barangays Cumba and Mabini, Lipa City Project was clearly granted a 3-year ITH but such terms and conditions do not provide for any exemption from other taxes that Communities Batangas may be subject to on its business transactions. Thus, Communities Batangas' Pine Grove-Barangays Cumba and Mabini, Lipa 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. 1 Thus, only the sales by Communities Batangas' Pine Grove-Barangays Cumba and Mabini, Lipa City Project of housing units with selling price of not more than the aforementioned price ceilings shall be exempt from VAT. Pursuant to Section 4 of Republic Act (RA) No. 10708, Communities Batangas is required to file its tax returns and pay its tax liabilities, on or before the deadline as provided under the 1997 Tax Code, as amended, using the electronic system for filing and payment of taxes of the BIR. Furthermore, Communities Batangas shall file with BOI a complete annual tax incentives report of its income-based tax incentives, value-added tax (VAT) and duty exemptions, deductions, credits or exclusions from the tax base, as may be provided under E.O. 226, within thirty (30) days from the deadline for filing of tax returns and payment of taxes. It should be understood that Communities Batangas' 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. SDAaTC Likewise, Communities Batangas 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 Batangas ' 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. AaCTcI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. 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.