BIR Ruling No. 321-15

September 22, 2015 BIR RULING NO. 321-15 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 Bldg., CV Starr Avenue Philamlife Village, Pamplona, Las Pias City Attention: Atty. Cecilia A. Ramilo Tax Department Head Gentlemen : This refers to your letter dated October 22, 2014 stating that Household Development Corporation ('Household Development' for brevity) with Tax Identification No. 001-221-703-000 is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) under Company Reg. No. 75257. It is registered with the Board of Investments (BOI) as a New Developer of Low-Cost Mass Housing Project (Camella San Jose Del Monte Brgy. Sto. Cristo, San Jose del Monte, Bulacan) on a Non-Pioneer status under Certificate of Registration No. 2014-183 dated October 21, 2014. Household Development has been granted Income Tax Holiday (ITH) by the BOI for a period of four (4) years from October 2014 or actual start of commercial operations/selling, whichever is earlier but in no case earlier than the date of registration. Household Development's Camella San Jose Del Monte Brgy. Sto. Cristo, San Jose del Monte, Bulacan Project is registered with Housing and Land Use Regulatory Board (HLURB) under Certificate of Registration No. 25026; and holds HLURB License to Sell No. 26822; 1 and under the Specific Terms and Conditions of its BOI Registration, Household Development shall construct and sell two hundred seventeen (217) units of low-cost mass housing for Camella San Jose Del Monte Brgy. Sto. Cristo, San Jose del Monte, Bulacan Project based on the following schedule: SDHTEC Year Volume (No. of Units) 1 45 2 64 3 59 4 49 Total 217 ==== 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, 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 Household Development's Camella San Jose Del Monte Brgy. Sto. Cristo, San Jose del Monte, Bulacan Project is a BOI registered project, this Office is of the opinion as it hereby holds, that income payments received by Household Development in connection with its housing project, Camella San Jose Del Monte Brgy. Sto. Cristo, San Jose del Monte, Bulacan (on the 217 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 October 2014 or actual start of commercial operations/selling, whichever is earlier but in no case earlier than the date of registration. 2 It must be emphasized, however, that the above exemption from CWT covers only income directly attributable to revenues generated from the registered activity, Household Development's Camella San Jose Del Monte Brgy. Sto. Cristo, San Jose del Monte, Bulacan Project involving 217 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 Household Development's Camella San Jose Del Monte Brgy. Sto. Cristo, San Jose del Monte, Bulacan 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 submit proof of verified compliance with the 20% socialized housing requirement for its existing projects under CR Nos. 2010-218, 2011-015, 2011-016, 2011-078, 2011-079, 2011-125, 2011-227, 2011-262, 2011-283, 2012-284, 2012-026 and 2012-090 before availment of ITH. Compliance with 20% socialized housing requirement should be proportionate to the number of low-cost housing units 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: (1) net value added, (2) job generation, (3) multiplier effect, and (4) measured capacity. The Board may reduce the ITH if the project does not realize the extent of economic benefits represented by the proponent at the time of its application. 3. The enterprise shall comply with the following representations: a. Net Value Added (NVA) should be at least 25% Y1 Y2 Y3 Y4 NVA 98% 98% 98% 98% b. Job Generation Number of Employees Total Pre- Y1 Y2 Y3 Y4 Employees operating 68 99 91 73 2 c. Investments and Timetable Activity Schedule Related Cost Expense/s (In Php'000) Land acquisition November 2012 Land Cost 40,053 to March 2014 Secure necessary Dec. 2012 to Pre-operating 5,075 license/permit/ Dec. 2013 Expenses registration from the government/ training costs Site preparation July 2013 to Land/Site 64,139 and development April 2016 Development Building/House Aug. 2013 to Building 141,137 Construction June 2017 Construction Start of Commercial October 2014 Working 5,000 Operations Capital Total 255,404 ======= d. Sales Revenues Year Volume (No. of Units) Value (P'000) 1 45 101,674 2 64 146,086 3 59 133,863 4 49 110,176 Total 217 491,799 ==== ====== 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. HESIcT In cases where the project's actual revenues exceed the projections in its application due to new markets/orders; additional employment/shifts, additional investments, the Board may increase the project's ITH availment proportionately. Request/s for adjustment of projected revenue must be filed before the filing of application for ITH. 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 between the registered activity/ies and non-registered activity/ies. 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 Service 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 Legal Service (LS) 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. The enterprise shall submit proof of compliance that at least twenty percent (20%) of the total subdivision area (estimated at 6,741 sq.m.) or total subdivision project cost (estimated at PhP51.08 M) 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 may be done through any of the following modes: The investment scheme may be complied with through any of the following modes: (1) Development of new settlement directly undertaken by registered activity; (2) Slum Upgrading; and (3) Development of a new settlement through joint venture arrangements with either: a Local Government Unit, the National Housing Authority, a subsidiary of the BOI-registered entity, or a developer accredited by the HLURB. Compliance with the twenty (20%) percent housing requirement must be completed within the ITH availment period and should be proportionate to the number of low-cost housing units being applied for ITH for the taxable year. 10. The enterprise must commit to the tenets of Good Governance. caITAC 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's Camella San Jose Del Monte Brgy. Sto. Cristo, San Jose del Monte, Bulacan Project was clearly granted a 4-year ITH but such terms and conditions do not provide for any exemption from other taxes that Household Development may be subject to on its business transactions. Thus, Household Development's Camella San Jose Del Monte Brgy. Sto. Cristo, San Jose del Monte, Bulacan 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. 3 Thus, only the sales by Household Development's Camella San Jose Del Monte Brgy. Sto. Cristo, San Jose del Monte, Bulacan Project housing units with selling price of not more than the aforementioned price ceilings shall be exempt from VAT. It should be understood that Household Development 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 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 Development'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. ICHDca Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. HLURB License to Sell No. 26822 issued to Household Development for Camella San Jose Del Monte Brgy. Sto. Cristo, San Jose del Monte, Bulacan Project covers 264 saleable lots or lots with housing units . 2. Movement of ITH period is subject to Art. 7 of E.O. 226 per BOI Specific Terms and Conditions No. 1. 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.