BIR Ruling No. 262-15

July 30, 2015 BIR RULING NO. 262-15 E.O. 226; RR 16-2011; Secs. 57 (B); 106 (A) (1) (a); 196 NIRC; BIR Ruling No. 334-11 DMC Urban Property Developers, Inc. 4th Floor Dacon Building 2281 Chino Roces Avenue (formerly Pasong Tamo Ext.) Makati City Attention: Joy B. Fajardo Accounting Officer Gentlemen : This refers to your letter dated July 22, 2014 stating that DMC Urban Property Developers, Inc. (DMC UPDI for brevity) with Tax Identification No. 000-352-360-000, is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) under Company Reg. No. 76125. It is registered with the Board of Investments (BOI) under Certificate of Registration No. 2012-188 dated September 10, 2012 as a new developer of low-cost mass housing project (Palmetto Place Building 2 Ma-a Road cor. Gem Road, Davao City Project) on a Non-Pioneer status in accordance with the Omnibus Investments Code of 1987 Executive Order (EO) No. 226. DMC UPDI has been granted Income Tax Holiday (ITH) by the BOI for a period of four (4) years from September 2012 or actual start of commercial operations/selling pursuant to EO 226. DMC UPDI's Palmetto Place Building 2 Ma-a Road cor. Gem Road, Davao City Project is registered with Housing and Land Use Regulatory Board (HLURB) under Certificate of Registration No. 22233 and holds HLURB License to Sell No. 24821; and under the Specific Terms and Conditions of its BOI Registration, DMC UPDI shall construct and sell one hundred ninety two (192) units of low-cost mass housing for Palmetto Place Building 2 Ma-a Road cor. Gem Road, Davao City Project based on the following schedule: Year Volume (No. of Units) 1 25 2 66 3 63 4 38 Total 192 ==== 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 DMC UPDI, 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 DMC UPDI's Palmetto Place Building 2 Ma-a Road cor. Gem Road, Davao City Project is a BOI registered project, this Office is of the opinion as it hereby holds, that income payments received by DMC UPDI in connection with its housing projects, Palmetto Place Building 2 Ma-a Road cor. Gem Road, Davao City Project (on the 192 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 September 2012 or actual start of commercial operations/selling, whichever is earlier but in no case earlier than the date of registration. 1 It must be emphasized, however, that the above exemption from CWT covers only revenues generated from its registered activity, DMC UPDI's Palmetto Place Building 2 Ma-a Road cor. Gem Road, Davao City Project involving the 192 low-cost mass housing units. Furthermore, such exemption shall not cover revenues from units with selling price exceeding Two Million Five Hundred Pesos (P2,500,000.00). 2 In the computation of ITH, interest income from in-house financing shall not be considered as revenues generated from the registered activity. TAIaHE Moreover, the entitlement to ITH of DMC UPDI's Palmetto Place Building 2 Ma-a Road cor. Gem Road, Davao City Project is not automatic as it still has to comply with the following provisions of the Specific Terms and Conditions of its BOI Registrations, 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 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 NVA 98.30% 98.30% b. Job Generation Year 1 Year 2 Year 3 Year 4 Total Employees 268 84 29 29 c. Investments and Timetable Activity Schedule Related Cost (In Php) Expense/s Land acquisition Completed Land cost 6,275,000 Secure necessary Completed Pre-operating 3,830,000 license/permit/ expenses registration from the government/training costs Site preparation and February Land/site 19,545,000 development 2011 to development July 2011 Building construction Nov. 2011 Building 175,293,000 to March construction 2013 Start of commercial September Working capital 1,022,000 operation 2012 Total Project Cost 205,965,000 ========== d. Sales Revenues Year Volume (No. of Value (Php) Units) 1 25 28,388 2 66 95,041 3 63 87,369 4 38 54,738 Total 192 266,436 ==== ======= 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 market orders; (c) additional employment and/or increase in number of working shifts. Request for adjustment of projected income may be submitted to the Board within the ITH entitlement period. 2. The enterprise shall submit audited segregated income statements for this registered project. Net income from operation of registered activity shall be certified under oath by CEO or CFO. 3. 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). 4. Secure from the HLURB an endorsement that it has faithfully complied with the approved development plan and a "Certificate of Good Housekeeping". 5. 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. 6. 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. 7. 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. 8. The enterprise shall submit proof of compliance that it has developed socialized housing project using either of the following schemes, otherwise, the ITH for that particular taxable year shall be deemed forfeited: cDHAES a. Investment: 20% of total saleable area (estimated at 1,394.14 sqm); or b. Direct Participation Scheme (at the option of the registered developer): i. 30% x (20% of the Building Construction Cost) (estimated at P10.51M); or ii. 40% of ITH (P4.848 M). The investment scheme may be complied with through any of the following modes: (1) New Settlement; (2) Slum Upgrading; and (3) Joint-Venture Projects with either the local government units or any of the housing agencies. The compliance with the socialized housing requirement may be allowed on staggered basis but shall be completed within the ITH entitlement period of the Developer. 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, DMC UPDI's Palmetto Place Building 2 Ma-a Road cor. Gem Road, Davao City Project was clearly granted a 4-year ITH but such terms and conditions do not provide for any exemption from other taxes that DMC UPDI may be subject to on its business transactions. Thus, DMC UPDI's Palmetto Place Building 2 Ma-a Road cor. Gem Road, Davao 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. 3 Thus, only the sales by DMC UPDI's Palmetto Place Building 2 Ma-a Road cor. Gem Road, Davao City Project of housing units with selling prices of not more than the aforementioned price ceilings shall be exempt from VAT. It should be understood that DMC UPDI's Palmetto Place Building 2 Ma-a Road cor. Gem Road, Davao City 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, DMC UPDI's Palmetto Place Building 2 Ma-a Road cor. Gem Road, Davao City 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, DMC UPDI's Palmetto Place Building 2 Ma-a Road cor. Gem Road, Davao City 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. Movement of ITH period is subject to Art. 7 of E.O. 226 per BOI Specific Terms and Conditions No. 1. 2. No. 8 (a) (i) of the BOI Specific Terms and Conditions. 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.