BIR Ruling No. 271-15

August 24, 2015 BIR RULING NO. 271-15 E.O. 226; RR 2-98; BIR Ruling No. 342-14; BIR Ruling No. 329-14 Prominence Property Development Corporation Unit 2501 Tycoon Center, Pearl Drive, Ortigas Center, Pasig City 1600 Attention: Mr. John Paul T. Dy President Gentlemen : This refers to your letter dated December 18, 2014, applying for tax exemption on the tax consequences of the Income Tax Holiday (ITH) granted by the Board of Investments (BOI) to PROMINENCE PROPERTY DEVELOPMENT CORPORATION (PPDC) under Executive Order (EO) No. 226 otherwise known as the "Omnibus Investments Code of 1987", for a period of four (4) years from the start of commercial operations selling. Documents submitted disclosed that PPDC, with Taxpayer's Identification No. (TIN) 004-967-772-000, is a domestic corporation duly organized and existing under Philippine Laws; that it is registered with the Securities and Exchange Commission (SEC) bearing SEC Certificate of Registration No. A199609165; that it is engaged in real estate development; that it is registered with the BOI as a New Developer of Low-Cost Mass Housing Project on a Non-Pioneer status for the mass Housing project: Project Location BOI Reg. Date of BOI Start of No. of Name No. Registration Commercial Units Operation/ ITH Silverdale Brgy. Tangos, 2014-188 October 27, October 2014 327 Residences Baliuag, 2014 Bulacan that under its BOI Terms and Conditions, the following project shall construct and sell units of low-cost mass housing units based on the following schedule: Project Name Year No. of Units Sales Value (PhP) Silverdale Residences 1 40 50,000,000 2 95 118,750,000 3 95 118,750,000 4 97 121,250,000 Total 327 408,750,000 === ========== that Silverdale Residences , located at Brgy. Tangos, Baliuag, Bulacan, is duly registered with the Housing and Land Use Regulatory Board (HLURB) under the following Certificate of Registration and was issued a License to Sell, to wit: Project Location HLURB Certificate HLURB License No. of Name of Registration No./ to Sell No./Date Units Date Issued Issued Silverdale Brgy. Tangos, 24196/October 9, 25979/October 9, 327 Residences Baliuag, 2012 2012 Bulacan that according to the Specific Terms and Conditions of its BOI Registration, PPDC (Silverdale Residences-Brgy. Tangos, Baliuag, Bulacan) is entitled to ITH for a period of four (4) years from October 2014 or the actual start of commercial operations whichever is earlier, but in no case earlier than the date of registration; that PPDC (Silverdale Residences-Brgy. Tangos, Baliuag, Bulacan)'s ITH shall be limited only to the revenue generated from the registered project; and that revenues from units with selling price exceeding P3.0M shall not be covered by ITH. cHECAS In reply, please be informed that under Section 2.57.5 (B) (2) of Revenue Regulations 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. (BIR Ruling No. 342-14 dated August 26, 2014) Accordingly, since PPDC (Silverdale Residences-Brgy. Tangos, Baliuag, Bulacan) is a BOI-registered project, this Office is of the opinion that income payments received by PPDC in connection with its housing project, Silverdale Residences-Brgy. Tangos, Baliuag, Bulacan , (on the 327 low-cost mass housing units as mentioned in the Specific Terms and Conditions of its BOI Registration), 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 (4) years from October 2014 or the actual start of commercial operations whichever is earlier but in no case earlier than the date of registration. 1 It must be emphasized, however, that the above exemption from creditable withholding tax covers only income directly attributable to revenues generated from PPDC's BOI-registered activity, Silverdale Residences-Brgy. Tangos, Baliuag, Bulacan , involving Three Hundred Twenty Seven (327) low-cost mass housing units used solely for family home or dwelling purposes and not for commercial purposes such as leasing, retail stores, offices, etc. Furthermore, such exemption shall not cover revenues from units with selling price exceeding Three Million Pesos (P3,000,000.00). 2 (BIR Ruling No. 342-14 dated August 26, 2014) 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, the entitlement of PROMINENCE PROPERTY DEVELOPMENT CORPORATION (Silverdale Residences-Brgy. Tangos, Baliuag, Bulacan) to ITH is not automatic as such project has to comply with Items 2, 3, 4, 5, 6, 9 a (ii) (iii) (iv) (v), 10 and 11 of the Specific Terms and Conditions of its pertinent BOI Registration, viz. : (1) The enterprise shall be required to increase its Stockholders' Equity to PhP65,000,000.00 and shall submit proof of compliance before availment of ITH. Equity shall include paid-up capital stock. Additional paid-in capital and unrestricted retained earnings. And restricted retained earning provided that such is intended to the project. Appraisal surplus and treasury stock should not be included as part of Stockholders' Equity for this purpose. (2) The enterprise shall submit a duly notarized affidavit executed by a licensed engineer or architect indicating the area or the number of lots and actual units built and the construction costs on the development of the compliance project for C.R. No. 2007-236 upon ITH application. The following documents relevant to the compliance project shall be attached to the Affidavit: a. License to Sell; b. Project Development Plan; c. Development Permit; and d. Verified Survey Return. (3) The enterprise shall submit a proof of verified compliance with the 20% socialized housing requirement for its existing project under C.R. No. 2007-236 before availment of ITH. Compliance with the 20% socialized housing requirement should be proportionate to the number of low-cost housing units being applied for ITH for the taxable year, e.g. , if the total revenue corresponding to the total registered units is 300 and 100% is sold and collected by the first year of availment, then the 20% socialized housing requirement for the 300 units fully sold or fully paid for should be met by the first year. (4) The enterprise 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; (5) In the grant of incentives, the extent of the project's ITH entitlement shall be based on the project's ability to contribute to the economy's development based on the following parameters: (1) net value added; (2) job generation; (3) multiplier effect; and (4) measured capacity; AHDacC a. Net Value Added should be at least 25% Pre-Op Yr-1 Yr-2 Yr-3 Yr-4 NVA (%) 92% 92% 92% 92% 92% b. Job Generation Number of Employees Pre-Op Yr-1 Yr-2 Yr-3 Yr-4 Total Employees 14 59 135 135 135 c. Investments and Timetable Activity Schedule Related Cost (Php) Expenses Land acquisition February 2011- Land Cost 40,219,000 February 2012 Secure necessary May 2012- Pre-operating 1,057,738 license/permit/ October 2012 Expenses registration from the government/training costs Site preparation and March 2013- Land/Site 61,047,145 development December 2016 Development Cost House Construction May 2013- House 154,507,500 September 2017 Construction Cost Start of Commercial October 2014 Working 3,168,617 Operations Capital Total Project Cost (TPC) 260,000,000 ========== d. Sales Revenues Year Volume Sales Value (No. of units) (Php) 1 40 50,000,000 2 95 118,750,000 3 95 118,750,000 4 97 121,250,000 Total 327 408,750,000 === ========== Net income qualified for ITH availment shall not be a result of gross revenues exceeding 10% of the projected gross revenue represented by the firm in its application; (6) The enterprise shall submit the list of cost items common to all its projects/activities (whether BOI or non-BOI-registered) and the methodology adopted in allocating the common costs between the registered and non-registered activity/ies; (7) The interest expense on the enterprise's liabilities shall be appropriately allocated between the registered and the non-registered activity/ies; (8) In the computation of ITH, interest income from in-house financing shall not be considered as revenues generated from the registered activity; (9) In the availment of ITH, the enterprise shall secure from the HLURB an endorsement that it has faithfully complied with the approved development plan and a " Certificate of Good Housekeeping "; (10) An application should be filed with the BOI Incentives Service within one (1) month from the 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 by SSS that the enterprise is in good standing in the remittance of SSS contributions of its employees. Further, any request for extension of the reckoning date of ITH availment should be filed prior to the scheduled date or within ninety (90) days from the occurrence of the fortuitous events and/or government delays; (11) The enterprise must secure a Certificate of ITH entitlement (CoE) from the BOI Legal Service (LS) prior to the filing of ITR with the BIR, otherwise, ITH for that particular taxable year without CoE shall be forfeited; (12) 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; (13) The enterprise shall submit proof of compliance that at least twenty percent (20%) of the total subdivision area (estimated at 6,054 sq.m.) or total subdivision project cost (estimated at PhP52M), has been developed and allocated for socialized housing within one year from date of registration or prior to availment of ITH, whichever is earlier. This shall be done through development of new settlement directly undertaken by registered entity. 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, PPDC (Silverdale Residences-Brgy. Tangos, Baliuag, Bulacan) was clearly granted 4-year ITH but such terms and conditions do not provide for any exemption from other taxes that it may be subject to on its business transactions. Thus, PPDC (Silverdale Residences-Brgy. Tangos, Baliuag, Bulacan) 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. 329-14 dated August 14, 2014) 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 PPDC (Silverdale Residences-Brgy. Tangos Baliuag, Bulacan) of housing units with selling price of not more than the aforementioned price ceiling shall be exempt from VAT. (BIR Ruling No. 329-14 dated August 14, 2014) It should be understood that PPDC 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 RR No. 2-98, as amended. IDSEAH Likewise, PPDC 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, PPDC'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. Per HLURB License to Sell Nos. 25979 dated October 9, 2012 issued for the project, Silverdale Residences, the maximum selling price per House and Lot is P1,250,000.00. 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.