Tax Liabilities of the Low Cost Housing Projects

October 23, 1990 BIR RULING NO. 204-90 25 039-89 001-90 Gentlemen : This refers to your letter dated September 17, 1990 stating that you are undertaking a low-cost housing project which is a mere continuation of your housing project started twenty years ago; that in 1970 to 1977 you were able to construct 72 condo-type housing units, and in 1979, 36 units were again constructed; that all the completed units were tax-exempt and were sold at the very low cost of P16,000.00 to P26,000.00 per unit to poor but deserving families; that presently you are constructing 147 units; that you are doing your best to construct the units at very low cost so that it would be affordable to the poor, but prices of materials and labor have gone up so high that the lowest price you can afford to sell is P270,000.00 per unit of 50 sq. m.; that you hope that at the price mentioned, you will still enjoy the privilege of being tax-exempt as before otherwise your objective as a charitable organization will be a farce because then if you have to add tax charges to your selling price, the cost will come out to be so expensive that the project might as well be considered to be a commercial venture as a result of which you will have to close up because there will be no more reason for your existence; that you also hope that the housing project will be exempt from the application of the zonal valuation in the area which is P10,000.00 per sq. m. while you are selling your unit to 50 sq. m. at P270,000.00; that under the zonal valuation, your units will be assessed at P500,000.00 which will be the basis of the creditable tax if you are not tax-exempt; and that it is preposterous for an organization like you which is doing charity work if you have to pay taxes based on a price higher than your actual selling price. aisadc Documentary evidence, e.g., articles of incorporation submitted show that the Foundation of St. Joseph the Worker, Inc. is organized to promote, encourage, sponsor and/or initiate scientific research and development projects in community development, agriculture, health sciences, and/or social sciences or humanities; to establish, set-up and maintain scholarships or professorial chairs in order to foster, promote and encourage the study and improvement of fundamental or pure research, applied research, developmental work and/or economic evaluation in the fields of community development, agriculture, health sciences, social sciences or humanities; to conduct, sponsor and publish the results of its scientific and/or technical research and development projects or studies in order to benefit the public on a non-discriminatory basis; to build, improve, enlarge, or equip or to cause the building, improvement, enlarging or equipping of buildings, libraries, laboratories, workshops or other educational accessories required for scientific research; to establish, maintain or endow institutions doing research of all kinds in the fields of community development, agriculture, health sciences, and/or social sciences and humanities; and to acquire properties, real or personal, receive contributions, gifts, endowments, bequests, legacies and donations of all kinds from donors here and abroad; and that no part of its assets or net income shall inure to the benefit of any of the members thereof. In connection therewith, you now request a ruling as to your tax liabilities relative to your aforementioned low cost housing projects. In reply, thereto, please be informed that basing from your articles of incorporation registered with the Securities and Exchange Commission (SEC) on July 14, 1970, the Foundation of St. Joseph the Worker, Inc. is a corporation organized for scientific purposes as contemplated under Section 26 (e) of the Tax Code. Accordingly, the Foundation is exempt from income tax on income received by it as such. However, the income of whatever kind and character derived by the Foundation from any of its properties, real or personal, or from any of its activities conducted for profit, regardless of the disposition made of such income , shall be subject to the corresponding tax imposed under the National Internal Revenue Code. Thus, pursuant to Revenue Memorandum Circular No. 7-90 clarifying Revenue Regulations Nos. 12-89 and 1-90 (implementing Sec. 50 (b), Tax Code) prescribing the withholding of creditable income tax on sale, exchange or transfer of real property, if the seller like the Foundation in this case, is an exempt entity under Section 26 of the Tax Code, income from the sale of real property is still subject to income tax and consequently to the withholding tax, because of the aforementioned proviso of said Section 26 that "notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, . . . , regardless of the disposition made of such income, shall be subject to tax imposed under this Code." As provided for in Revenue Regulations No. 1-90, and implemented by Revenue Memorandum Circular No. 7-90, the rates of creditable withholding tax on sales, exchanges or transfers of real properties have been reduced to 0%, 2.5%, or 5%, for real estate transactions the deeds of sale or transfer of which have been filed with the BIR on or after February 1, 1990 . Under said issuances, the vendor of real property becomes entitled to zero (0%) percent only if the consideration for the sale of the lot or house lot per transaction does not exceed P500,000 and he is registered with and certified to as engaged in low-cost housing projects under Batas Pambansa Blg. 220 (socialized housing law) by the Housing and Urban Development Coordinating Council (HUDCC) or the Housing and Urban Development Coordinating Council (HUDCC) or the Housing and Land Use Regulatory Board (HLURB). And when the vendor's housing project is registered with the above-mentioned government agency under Presidential Decree No. 957 (open market housing law), the transaction will be subject to either 2.5% or 5% withholding tax, notwithstanding the fact that the consideration is not more than P500,000. However, in order to remove the bias against low-cost housing projects registered under P.D. 957 and to simplify tax administration, all sales, exchanges or transfers of real property on or after March 1, 1990 shall be subject to zero (0%) percent , regardless of the law under which the project is registered, provided that the consideration does not exceed P500,000. In other words, it is the selling price or consideration (and not the law under which a project was approved) that determines whether or not a transaction is socialized/low-cost in nature. This is also in conformity with the prevailing ceiling for low-income housing as set by government housing facilities like the Pag-ibig. To be entitled to the lower withholding tax rates of 0% or 2.5%, the presentation of the copies of the Certificate of Registration and License to Sell for a subdivision or condominium project issued by HLURB shall be sufficient proof for the purposes of the required HUDCC/HLURB certification. (Revenue Memorandum Circular No. 16-90 dated February 16, 1990) Such being the case, since as a seller of housing units, the Foundation is registered with the certified to as engaged in housing projects by the HLURB under P.D. No. 957 (open market housing law) its deeds of sale or transfer of condominium units which have been filed with the BIR on or after February 1, 1990 (but before March 1, 1990) shall be subject to either 2.5% or 5% withholding tax, notwithstanding the fact that the consideration is not more than P500,000, pursuant to Revenue Regulations No. 1-90. On the other hand, subject to the same conditions abovementioned and regardless of the law under which the project is registered/approved , the sales of its condominium units on or after March 1, 1990 where the consideration does not exceed P500,000 shall be subject to zero (0%) percent pursuant to Revenue Memorandum Circular No. 16-90. It is understood, however, that for such sales, the Foundation is still subject to the regular income tax and should be reported in the taxpayer's income tax return, with its income tax payments under Revenue Regulations No. 12-89 as amended by Revenue Regulations No. 1-90 credited against its regular corporate income tax payments. Moreover, on all sales or exchanges of real property subject to the creditable withholding tax prescribed by Revenue Regulations No. 12-89 and 1-90, the basis of the withholding tax is the gross selling price or the total amount of consideration or its equivalent paid to the seller. Revenue Memorandum Circular No. 7-90 defines "gross selling price" as the consideration stated in the sales document or the fair market value/zonal value, whichever is higher. In accordance with the zonal valuation adopted by this Office, real property located in Barangay Sta. Lucia, Pasig, Metro Manila under the classification of a residential area to which the St. Joseph The Worker Foundation, Inc. Condominium belongs, is valued at P700.00 per square meter. cdta Very truly yours, (SGD.) JOSE U. ONG Commissioner