Whether SMDC Is Exempt from Creditable Withholding Tax on Income Payments Received from Its Registered Activity (Princeton Residences-Gilmore St., Quezon City)

June 28, 2016 BIR RULING NO. 303-16 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 19, 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 (Princeton Residences-Gilmore Street, Quezon City) on a Non-Pioneer status under Certificate of Registration No. 2010-035 dated February 05, 2010. SMDC has been granted Income Tax Holiday (ITH) by the BOI for a period of four (4) years from February 2010 or actual start of commercial operations/selling, whichever is earlier but in no case earlier than the date of registration. SMDC's Princeton Residences-Gilmore Street, Quezon City Project is registered with Housing and Land Use Regulatory Board (HLURB) Expanded National Capital Region Field Office, particularly described as follows: Certificate of License to Name of Project/Location No. of Saleable Maximum Registration No. Sell No. Lots Selling Price 22846 27021 Princeton Residences- 1,096 residential n/a Gilmore Street, Quezon City units/ 3 commercial units/ 145 parking slots Under the Specific Terms and Conditions of its BOI Registration, the ITH of SMDC shall cover only one thousand ninety five (1,095) units of low-cost mass housing for SMDC's Princeton Residences-Gilmore Street, 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 Princeton Residences-Gilmore Street, 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, Princeton Residences-Gilmore Street, Quezon City (on the 1,095 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 February 2010 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 Princeton Residences-Gilmore Street, Quezon City Project involving 1,095 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. CAIHTE Moreover, the entitlement to ITH of SMDC's Princeton Residences-Gilmore Street, 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 1,095 units of low-cost mass housing based on the following schedule: Year Volume (No. of Units) Value (P'000) 1 9 19,437 2 430 906,542 3 473 997,940 4 183 384,784 Total 1,095 2,308,703 ==== ======== 2. The enterprise shall adhere to the following selling prices as represented: Unit Type Selling Price (Sq.m.) (Php'000) Studio 1,666 1 Bedroom 2,136 2 Bedrooms 2,800 2 Bedrooms end units 3,000 3. The enterprise shall observe the following project timetable: Description Completion Related Cost date Expenses (In PhP'000) (Month/Year) 1. Site Completed Land cost 43,000 acquisition (2,401 sq.m.) 2. Obtaining Completed Government 9,000 appropriate application fees license/agreement/ (LGU, DENR, permit from HLURB, government GDMF) agencies 3. Site On-going Rental of payloader 1,570,000 Preparation and other heavy and equipment, building Development temporary facilities, surveying works, Hiring of road and walkway contractors preparation, site preparation, Completion of drainage system, Site riprap, electrical and preparation water distribution, amenities and Building greening and tree construction planting 4. Start of February 2010 Working capital 322,000 commercial operation Total Project Cost 1,944,000 ======= 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. Prior to availment of ITH and subject to HLURB certification, the enterprise shall submit proof of compliance that at least twenty percent (20%) of the total condominium project cost has been developed and allocated for socialized housing within the same city or municipality, whenever feasible and in accordance with other existing laws. Condominium projects with a density of one hundred (100) units per hectare shall be considered as having fully complied with the twenty percent (20%) requirement. Otherwise, the ITH for that particular 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 Princeton Residences-Gilmore Street, Quezon City Project was clearly granted a 4-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 Princeton Residences-Gilmore Street, 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 Princeton Residences-Gilmore Street, Quezon City Project of housing units with selling price of not more than the aforementioned price ceilings shall be exempt from VAT. DETACa 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. 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.