BIR Ruling No. 250-13

July 8, 2013 BIR RULING NO. 250-13 E.O. 226; RR 2-98; RR 16-11; BIR Ruling No. 334-2011 Hausland Development Corporation HLDC Corporate Center, 43-35 Don Bonifacio Avenue Pulong Maragol, Angeles City Attention: Atty. Christopher Ryan T. Tan Legal Counsel Gentlemen : This refers to your letter dated October 9, 2012 requesting tax exemption as a New Developer of Low-Cost Mass Housing Project (Mansfield Residences-Brgy. Sto. Domingo, Angeles City, Pampanga) pursuant to the provisions of the Omnibus Investments Code of 1987. HDITCS Documents submitted disclosed that Hausland Development Corporation ("HLDC") with Taxpayer's Identification No. 233-293-553-000, is a domestic corporation engaged in real estate business and registered with the Securities and Exchange Commission (SEC) under SEC Registration No. CS200413535 dated August 31, 2004; that HLDC is registered with the Board of Investments (BOI) as a New Developer of Low-Cost Mass Housing Project (Horizontal) on a Non-Pioneer status per BOI Registration No. 2012-130 dated July 13, 2012; that its BOI registration particularly covers the project: Project Name Location Start of Commercial No. of Units Operation/ITH Mansfield Residences Brgy. Sto. Domingo, March 2013 1,153 Angeles City, Pampanga that according to the Terms and Conditions of its BOI Registration, HLDC is entitled to Income Tax Holiday (ITH) for a period of four (4) years from March 2013 or the actual start of commercial operations/selling whichever is earlier, but in no case earlier than the date of registration; that HLDC's ITH shall be limited only to the revenue generated from HLDC's registered project (Mansfield Residences-Brgy. Sto. Domingo, Angeles City, Pampanga);that revenues from units in HLDC's Mansfield Residences-Brgy. Sto. Domingo, Angeles City, Pampanga with selling price exceeding PhP2.50M shall not be covered by ITH; and that the project is duly registered with the Housing and Land Use Regulatory Board (HLURB) Region III, particularly described as follows: Certificate of License to Sell No. Name of No. of Registration No. Project/Location Saleable Lots 23817 24336 Mansfield Residences 659 dated October 9, 2012 dated October 9, 2012 Phase I/Brgy. Sto. Domingo, Angeles City, Pampanga 23818 24337 Mansfield Residences 211 dated October 9, 2012 dated October 9, 2012 Phase II/Brgy. Sto. Domingo, Angeles City, Pampanga 23819 24338 Mansfield Residences 87 dated October 9, 2012 dated October 9, 2012 Phase III/Brgy. Sto. Domingo, Angeles City, Pampanga 23820 24339 Mansfield Residences 205 dated October 9, 2012 dated October 9, 2012 Phase IV/Brgy. Sto. Domingo, Angeles City, Pampanga 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 the Omnibus Investments Code of 1987. AECIaD Accordingly, since HLDC's Mansfield Residences-Brgy. Sto. Domingo, Angeles City, Pampanga, is a BOI registered project, this Office is of the opinion as it hereby holds, that income payments received by HLDC in connection with the aforementioned housing project, are exempt from the creditable withholding tax imposed under RR No. 2-98, as amended by RR No. 6-2001, for a period of four years starting from March 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 the creditable withholding tax covers only revenues generated from the registered project, Mansfield Residences-Brgy. Sto. Domingo, Angeles City, Pampanga. Furthermore, revenues from units with selling price exceeding Two Million Five Hundred Pesos (P2,500,000.00) shall not be covered by ITH. 1 (BIR Ruling No. 334-2011 dated September 7, 2011) In the computation of ITH, interest income from in-house financing shall not be considered as part of the revenues generated from the registered activity. Moreover, HLDC's Mansfield Residences-Brgy. Sto. Domingo, Angeles City, Pampanga entitlement to ITH is not automatic as it has still to comply with Sections 3, 4, 5, 6 and 9 (v) of the Specific Terms and Conditions of the BOI Registration, viz. : 1. HLDC shall increase its stockholders equity by at least Php335.64M equivalent to 25% of the total project cost and shall submit proof of compliance before availment of Income Tax Holiday (ITH) incentive. Equity shall include paid-up capital stock, additional paid-in capital and unrestricted retained earnings and restricted retained earnings provided that such is intended for the project. Appraisal surplus and treasury stock should not be included as part of stockholders equity for this purpose. (Sec. 3) 2. HLDC shall submit an undertaking that the incentives availed of shall translate to the benefit of the consumers of mass housing. Annual report shall be submitted to the BOI reflecting compliance to this condition. (Sec. 4) 3. HLDC shall submit a detailed report on low-cost mass housing units sold. Annual report shall be submitted to the BOI reflecting compliance to this condition. (Sec. 5) DTcHaA 4. 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) project's net value added, (2) job generation, (3) multiplier effect, and (4) measured capacity. In the event that the registered enterprise fails to implement the project 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 the following: a. Net Value Added (NVA) should be at least 25% Year 1 Year 2 Year 3 Year 4 Construction Cost (P'000) 331,602 354,330 301,714 72,430 Raw Materials (P'000) NVA b. Job Generation Year 1 Year 2 Year 3 Year 4 Employees paid on monthly 586 833 710 170 basis Workers paid on a daily basis 117 167 142 34 Full-time workers paid by 391 576 483 74 contractors Others (Managers & Supervisors) 20 21 21 21 Total 1,114 1,597 1,356 299 ==== ==== ==== === In the determination of the enterprise's compliance with the required job generation, both organic and outsourced employment shall be considered. DIEAHc c. Investments and Timetable Activity Schedule Related Cost Expense/s (In Php'000) Site acquisition Completed Raw land cost Obtained appropriate Completed Pre- 198,852 license/agreement/permit operating from the government expenses agencies Site preparation and October Land 11,600 development 2100 to development March 2013 cost House construction January House 169,915 2012 to construction January cost 2016 Start of commercial March 2013 Working 1,040,076 operation capital Total Project Cost 1,430,076 ======== d. Sales Revenues Year Volume (No. of Units) Value (Php'000) 1 346 549,295 2 393 624,740 3 334 532,150 4 80 127,490 Total 1,153 1,833,675 ===== ======== 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 bust 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. AECacS 5. In the availment of ITH, HLDC shall secure from the HLURB an endorsement that it has faithfully complied with the approved development plan and a "Certificate of Good Housekeeping".(Sec. 9 (v)) 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, HLDC's Mansfield Residences-Brgy. Sto. Domingo, Angeles City, Pampanga was clearly granted a 4-year ITH but such terms and conditions do not provide for any exemption from other taxes that it may be subject on its business transactions. Thus, HLDC's Mansfield Residences-Brgy. Sto. Domingo, Angeles City, Pampanga will remain subject to Value-Added Tax (VAT) and Documentary Stamp Tax (DST) on its sales of housing units pursuant to Sections 106 (A) (1) (a) and 196 of the Tax Code of 1997, as amended. (BIR Ruling No. 334-2011 dated September 7, 2011) In relation thereto, Section 109 (1) (P) of the Tax Code of 1997, as amended, provides, that the sale of residential lot valued at One Million Nine Hundred Nineteen Thousand Five Hundred Pesos (P1,919,500) 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) and below is VAT-exempt. (Revenue Regulations No. 16-2011 dated October 27, 2011) Thus, only the sales by HLDC's Mansfield Residences-Brgy. Sto. Domingo, Angeles City, Pampanga, of housing units with selling price of not more than the aforementioned price ceiling shall be exempt from VAT. (BIR Ruling No. 334-2011 dated September 7, 2011) It should be understood that HLDC-Mansfield Residences Housing 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 withholding tax on compensation, 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, HLDC is required to file on or before the 15th day of the fourth month following the close of your accounting period a Profit and Loss Statement and Balance Sheet with the Annual Information Return under oath, stating your gross income and expenses incurred during the taxable year. Finally, HLDC'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 you have been complying with the conditions under which you have been granted tax exemption or tax incentives and your 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 as represented are different, then this ruling shall be considered null and void. TEDAHI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Section 9 (a) (i) of the Specific Terms and Conditions.