Exemption of SMDC from Creditable Withholding Tax on Income Payments Received from Registered Activity (Mezza II Residences-Brgy. Doña Imelda, Quezon City)

June 22, 2016 BIR RULING NO. 264-16 E.O. 226; RR 16-2011; Secs. 57 (B); 106 (A) (1) (a); 196 NIRC; BIR Ruling No. 334-11 SM Development Corporation 15th Floor Two E-Com Center, Harbor Drive Mall of Asia Complex, Brgy. 76, Zone 10, CBP-1A Pasay City Attention: Cecilia R. Patricio Authorized Representative Gentlemen : This refers to your letter dated March 05, 2015 stating that SM Development Corporation ('SMDC' for brevity) with Tax Identification No. 000-601-470-000 is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) under Company Reg. No. 56909. It is registered with the Board of Investments (BOI) as a New Developer of Low-Cost Mass Housing Project (Mezza II Residences-Aurora Blvd. cor. G. Araneta Ave. Guirayan St., Brgy. Doa Imelda, Quezon City) on a Non-Pioneer status under Certificate of Registration No. 2011-085 dated May 12, 2011. SMDC has been granted Income Tax Holiday (ITH) by the BOI for a period of three (3) years from October 2012 or actual start of commercial operations/selling, whichever is earlier but in no case earlier than the date of registration. SMDC's Mezza II Residences-Aurora Blvd. cor. G. Araneta Ave. Guirayan St., Brgy. Doa Imelda, Quezon City Project is registered with Housing and Land Use Regulatory Board (HLURB) Expanded National Capital Region Field Office, particularly described as follows: HTcADC Certificate of License to Sell Name of Project/ Location No. of Saleable Maximum Selling Registration No. No. Lots Price 24012 26949 Mezza II Residences- 1,324 residential n/a Aurora Blvd. Brgy. cor. G. and 2 commercial Araneta Ave. Guirayan St., units with 274 Brgy. Doa Imelda, Quezon parking slots City Under the Specific Terms and Conditions of its BOI Registration, the ITH of SMDC shall cover only one thousand three hundred thirty nine (1,339) units of low-cost mass housing for SMDC's Mezza II Residences-Aurora Blvd. cor. G. Araneta Ave. Guirayan St., Brgy. Doa Imelda, Quezon City Project. 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 SMDC, 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 SMDC's Mezza II Residences-Aurora Blvd. cor. G. Araneta Ave. Guirayan St., Brgy. Doa Imelda, Quezon City Project is a BOI registered project, this Office is of the opinion as it hereby holds, that income payments received by SMDC in connection with its housing project, Mezza II Residences-Aurora Blvd. cor. G. Araneta Ave. Guirayan St., Brgy. Doa Imelda, Quezon City Project (on the 1,339 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 October 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, SMDC's Mezza II Residences-Aurora Blvd. cor. G. Araneta Ave. Guirayan St., Brgy. Doa Imelda, Quezon City Project involving 1,339 low-cost mass housing units. 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 SMDC's Mezza II Residences-Aurora Blvd. cor. G. Araneta Ave. Guirayan St., Brgy. Doa Imelda, Quezon City 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. : 1. The enterprise shall construct and sell 1,339 units of low-cost mass housing based on the following schedule: Year Volume (No. of Units) Value (P'000) 1 401 782,370 2 670 1,303,950 3 268 521,580 Total 1,339 2,607,900 ===== ========= 2. The enterprise shall adhere to the following selling prices as represented: Floor Area Selling Price (Sq.m.) (Php) Studio Type 1,100,000.00 1 Bedroom 2,100,000.00 3. The enterprise shall observe the following project timetable: Activity Schedule Related Cost (P'000) (month, year) Expenses Site and acquisition March 2009 Raw Land 111,456 Acquisition Cost Obtain appropriate December 2010 Pre-operating 15,000 license/agreement/permit Expenses from the government agencies Acquisition and installation June 2013 Machinery/ 40,000 of equipment Equipment Cost Site Preparation and June 2011 Land Development 41,827 Development June 2014 Cost Building Construction Cost 1,429,240 Start of Commercial October 2012 Working capital 29,339 Operation Total Project Cost 1,666,862 ======== 4. The enterprise shall submit a list of common cost items and cost allocation methodology for its other projects/activities (whether BOI-registered or non-BOI registered) and the methodology adopted in allocating the common costs. aScITE 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 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. 7. 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. 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. Submit proof of compliance that at least twenty (20%) percent of the total saleable area for vertical housing projects has been developed and allocated for socialized housing using either the options: a. Investment: 20% of total saleable area b. Donation (whichever is lower between i and ii) i. 30% x (20% of the Building Construction Cost); or ii. 40% of ITH. The investment scheme may be complied with through any of the following modes: (1) New Settlement; (2) Slum Upgrading; and (3) Joint-Venture Projects. Otherwise, the ITH for that particular taxable year shall be deemed forfeited. 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, SMDC's Mezza II Residences-Aurora Blvd. cor. G. Araneta Ave. Guirayan St., Brgy. Doa Imelda, Quezon City Project was clearly granted a 3-year ITH but such terms and conditions do not provide for any exemption from other taxes that SMDC may be subject to on its business transactions. Thus, SMDC's Mezza II Residences-Aurora Blvd. cor. G. Araneta Ave. Guirayan St., Brgy. Doa Imelda, Quezon 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 SMDC's Mezza II Residences-Aurora Blvd. cor. G. Araneta Ave. Guirayan St., Brgy. Doa Imelda, Quezon 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, SMDC 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, SMDC 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 SMDC 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, SMDC 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, SMDC'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. HEITAD 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.