BIR Ruling No. 315-13

August 7, 2013 BIR RULING NO. 315-13 E.O. 226; RR 2-98; RR 16-11; BIR Ruling No. 334-2011 Household Development Corporation 3rd Level Starmall Las Pias, C.V. Starr Avenue Philamlife Village, Pamplona, Las Pias City Attention: Atty. Cecilia A. Ramilo Tax Department Head Gentlemen : This refers to your letter dated December 14, 2012 requesting exemption from withholding tax on sale of house and lot units on its subdivision project (Lessandra General Trias, Brgy. Santiago, Gen. Trias, Cavite) which is entitled to Income Tax Holiday (ITH) granted by the Board of Investments (BOI) under Executive Order (E.O) 226 or of the Omnibus Investments Code of 1987. Documents submitted disclosed that Household Development Corporation (Household) with Taxpayer's Identification No. 001-221-703-000, is a domestic corporation engaged in real estate business and registered with the Securities and Exchange Commission (SEC) under SEC Registration No. 75257; that Household Development Corporation is registered with the Board of Investments (BOI) as an Expanding Developer of Low-Cost Mass Housing Project (Horizontal) on a Non-Pioneer status per BOI Registration No. 2012-266 dated December 13, 2012; that its BOI registration particularly covers the project: Project Name Location Start of Commercial No. of Operation/ITH Units Lessandra General Trias Brgy. Santiago, Gen. December 2012 285 Trias, Cavite that according to the Terms and Conditions of its BOI Registration, Household is entitled to Income Tax Holiday (ITH) for a period of three (3) years from December 2012 or the actual start of commercial operations/selling whichever is earlier, but in no case earlier than the date of registration; that Household's ITH shall be limited only to the revenue generated from Household's registered project (Lessandra General Trias, Brgy. Santiago, Gen. Trias, Cavite); that revenues from units in Household's Lessandra General Trias with selling price exceeding PhP3.0M shall not be covered by ITH; and that the project is duly registered with the Housing and Land Use Regulatory Board (HLURB) Region III, particularly described as follows: Certificate of License to Sell No. Name of No. of Registration No. Project/Location Saleable Lots 23694 25573 Lessandra General 285 dated September 26, 2012 dated September 26, 2012 Trias, Brgy. Santiago, Gen. Trias, Cavite 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 the Omnibus Investments Code of 1987. Accordingly, since Household's Lessandra General Trias-Brgy. Santiago, Gen. Trias, Cavite is a BOI registered project, this Office is of the opinion as it hereby holds, that income payments received by Household in connection with the aforementioned housing project, is exempt from the creditable withholding tax imposed under RR No. 2-98, as amended by RR No. 6-2001, for a period of three years starting from December 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 the creditable withholding tax covers only revenues generated from the registered project, Household's Lessandra General Trias-Brgy. Santiago, Gen. Trias, Cavite. Furthermore, revenues from units with selling price exceeding Three Million Pesos (P3,000,000.00) shall not be covered by ITH. 1 (BIR Ruling No. 334-2011 dated September 7, 2011) 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, Household's Lessandra General Trias-Brgy. Santiago, Gen. Trias, Cavite entitlement to ITH is not automatic as it still has to comply with the Specific Terms and Conditions of its BOI Registration, viz. : 1. The enterprise shall submit proof of verified compliance with its tree-planting activity for its housing projects and with its 20% socialized housing requirement for its existing project. Compliance with the 20% socialized housing requirement should be proportionate to the number of low-cost housing project being applied for ITH for the taxable year; 2. 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 Year 3 NVA 96.41% 96.43% 96.42% b. Job Generation Year 1 Year 2 Year 3 Employees 45 56 48 In the determination of the enterprise's compliance with the required job generation, both organic and outsourced employment shall be considered. c. Investments and Timetable Activity Schedule Related Cost Expense/s (In Php'000) Land acquisition July 2011 Land cost 11,012 Secure necessary February Pre-operating 2,516 license/permit/registration 2012 to expenses from the government/training December costs 2012 Site preparation and December Land/site 24,714 development 2012 to development August 2016 Building construction December Building 70,598 2012 to construction November 2016 Start of commercial operation December Working 5,000 2012 capital Total Project Cost 113,840 ======= d. Sales Revenues Year Volume (No. of Value (Php'000) Units) 1 89 66,064 2 105 77,982 3 91 67,806 Total 285 211,852 ==== ======= 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-BOI 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; and 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. 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 markets/orders; (c) additional employment and/or increase in number of working shifts. Request/s for adjustment of projected income may be submitted to the Board within the ITH entitlement period. 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's Lessandra General Trias-Brgy. Santiago, Gen. Trias, Cavite clearly granted a 3-year ITH but such terms and conditions do not provide for any exemption from other taxes that it may be subject on its business transactions. Thus, Household's Lessandra General Trias-Brgy. Santiago, Gen. Trias, Cavite project 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. 334-2011 dated September 7, 2011) In relation thereto, Section 109 (1) (P) of the Tax Code of 1997, as amended, provides, that the sale of residential lot valued at One Million Nine Hundred Nineteen Thousand Five Hundred Pesos (P1,919,500) 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) and below is VAT-exempt. (Revenue Regulations No. 16-2011 dated October 27, 2011) Thus, only the sales by Household's Lessandra General Trias-Brgy. Santiago, Gen. Trias, Cavite, of housing units with selling price of not more than the aforementioned price ceilings shall be exempt from VAT. (BIR Ruling No. 334-2011 dated September 7, 2011) It should be understood that Household's Lessandra General Trias Housing 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 withholding tax on compensation, or if it makes payments to individuals or corporations subject to the withholding taxes at 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 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, Household'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 as represented 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. Section 9 (a) (i) of the Specific Terms and Conditions.