BIR Ruling No. 266-12

April 25, 2012 BIR RULING NO. 266-12 E.O. 226; RR 16-2011; Secs. 57 (B); 106 (A) (1) (a); 196 NIRC; BIR Ruling No. 334-11 Household Development Corporation 3rd Level Starmall Las Pias, C.V. Starr Avenue Philamlife Village, Pamplona, Las Pias City Attention: Ms. Lorelyn D. Mercado Chief Accountant Gentlemen : This refers to your letter dated April 29, 2011 stating that Household Development Corporation is a real property developer habitually engaged in the business of developing and constructing affordable house and lot units; that its projects are duly registered with the Housing and Land Use Regulatory Board (HLURB) under Certificate of Registration No. 22427 and License to Sell No. 23739; that at present, it has an ongoing subdivision project called Cerritos Heights located in Molino IV, Bacoor, Cavite; that it has been registered with the Board of Investments (BOI) per Certificate of Registration No. 2011-079 dated April 28, 2011 as an expanding developer of low-cost mass housing project on a non-pioneer status under the Omnibus Investments Code of 1987 (E.O. 226); that it shall be entitled to income tax holiday (ITH) for a period of three (3) years from April 2011 or actual start of commercial operations/selling, whichever is earlier, but in no case earlier than the date of registration; that the ITH shall be limited only to the revenue generated from its registered project (Cerritos Heights, Molino IV, Bacoor, Cavite); and that under the Specific Terms and Conditions of its BOI Registration, Household Development Corporation Cerritos Heights Project shall construct and sell Six Hundred Eighty Five (685) units of low-cost mass housing based on the following schedule: Year Volume (No. of Units) Value (Php '000) 1 195 408,492 2 242 509,585 3 248 524,892 Total 685 1,442,969 ===== ======= 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 Household Development Corporation, 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. CSaHDT Accordingly, since Household Development Corporation Cerritos Heights Project, is a BOI registered project, this Office is of the opinion as it hereby holds, that income payments received by Household Development Corporation in connection with the aforementioned housing project, Household Development Corporation Cerritos Heights Project, are exempt from CWT imposed under RR No. 2-98, as amended by RR No. 6-2001, for a period of three (3) years from April 2011. It must be emphasized, however, that the above exemption from CWT covers only revenues generated from the registered activity, Household Development Corporation Cerritos Heights Project. Furthermore, such exemption shall not cover revenues from units with selling price exceeding Three Million Pesos (P3,000,000.00). ( BIR Ruling No . 334-11 dated September 7, 2011 ). In the computation of ITH, interest income from in-house financing shall not be considered as revenues generated from the registered activity. Moreover, Household Development Corporation Cerritos Heights Project's entitlement to ITH is not automatic as it has still to comply with the provisions of Section 9 (a) of the Specific Terms and Conditions of the BOI Registration, viz. : 1. Secure from the HLURB an endorsement that it has faithfully complied with the approved development plan and a "certificate of good housekeeping"; 2. 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; and 3. 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. IDTSaC 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, Household Development Corporation Cerritos Heights Project was clearly granted a 3-year ITH but such terms and conditions do not provide for any exemption from other taxes that Household Development Corporation may be subject to on its business transactions. Thus, Household Development Corporation Cerritos Heights 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 Household Development Corporation Cerritos Heights Project of housing units with selling price of not more than the aforementioned price ceiling shall be exempt from VAT. It should be understood that Household Development Corporation Cerritos Heights 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, Household Development Corporation Cerritos Heights Project 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, Household Development Corporation Cerritos Heights 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 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 are different, then this ruling shall be considered null and void. TcHEaI 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.