BIR Ruling No. 323-13

August 28, 2013 BIR RULING NO. 323-13 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: Atty. Cecilia A. Ramilo Tax Department Head Gentlemen : This refers to your letter dated December 14, 2013 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 an Expanding Developer of Low-Cost Mass Housing Project (Crestwood Phase 3 Bayugo-Buliran, Brgy. San Luis, Antipolo City) on a Non-Pioneer status under the Omnibus Investments Code of 1987 or Executive Order (EO) No. 226. Household Development has been granted Income Tax Holiday (ITH) by the BOI under Certificate of Registration No. 2012-265 dated December 13, 2012 for a period of three (3) years from December 2012 or actual start of commercial operations/selling, whichever is earlier but in no case earlier than the date of registration. Household Development's Crestwood Phase 3 Bayugo-Buliran, Brgy. San Luis, Antipolo City Project is registered with Housing and Land Use Regulatory Board (HLURB) under Certificate of Registration No. 24006 and holds HLURB License to Sell No. 25686; and under the Specific Terms and Conditions of its BOI Registration, Household Development shall construct and sell eighty eight (88) units of low-cost mass housing for Crestwood Phase 3 Bayugo-Buliran, Brgy. San Luis, Antipolo City Project based on the following schedule: cAEDTa Year Volume (No. of Units) 1 23 2 37 3 28 Total 88 == 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 Crestwood Phase 3 Bayugo-Buliran, Brgy. San Luis, Antipolo City 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, Crestwood Phase 3 Bayugo-Buliran, Brgy. San Luis, Antipolo City (on the 88 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 3 years from December 2012 or actual start of commercial operations/selling, whichever is earlier but in no case earlier than the date of registration. 1 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 Crestwood Phase 3 Bayugo-Buliran, Brgy. San Luis, Antipolo City 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. cEHITA Moreover, the entitlement to ITH of Household Development's Crestwood Phase 3 Bayugo-Buliran, Brgy. San Luis, Antipolo City Project is not automatic as it still has to comply with the following provisions of the Specific Terms and Conditions of its BOI Registration, viz. : 1. 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 97.52% 97.54% 97.56% b. Job Generation Year 1 Year 2 Year 3 Employees 30 51 37 c. Investments and Timetable Activity Schedule Related Cost Expense/s (In Php'000) Land acquisition November Land cost 19,462 2011 Secure necessary January 2012 Pre- 2,217 license/permit/registration to December operating from the 2012 expenses government/training costs Site preparation and November Land/site 26,399 development 2012 to development August 2015 Building construction November Building 63,233 2012 to construction September 2015 Start of commercial December Working 5,000 operation 2012 capital Total Project Cost 116,311 ======= d. Sales Revenues Year Volume (No. of Value Units) (Php'000) 1 23 57,985 2 37 93,080 3 28 69,899 Total 88 220,954 == ====== Net income that exceeds 10% of the revenue represented at the time of application shall not be eligible to ITH unless, the Board is informed in writing by the proponent in advance before the revenue is expected to exceed the projections in the application for registration submitted to the Board. DcSEHT 2. The enterprise shall submit a list of common cost items and cost allocation methodology for its other projects/activities (whether BOI-registered or non-registered). 3. Secure from the HLURB an endorsement that it has faithfully complied with the approved development plan and a "Certificate of Good Housekeeping". 4. 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. 5. 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. 6. 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. 7. Submit proof of compliance that at least twenty percent of the total subdivision area has been developed and allocated for socialized housing within one year from date of registration or prior to availment of ITH; otherwise, 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, Household Development's Crestwood Phase 3 Bayugo-Buliran, Brgy. San Luis, Antipolo City 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 may be subject to on its business transactions. Thus, Household Development's Crestwood Phase 3 Bayugo-Buliran, Brgy. San Luis, Antipolo 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) IEHSDA 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. 2 Thus, only the sales by Household Development's Crestwood Phase 3 Bayugo-Buliran, Brgy. San Luis, Antipolo City Project of 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's Crestwood Phase 3 Bayugo-Buliran, Brgy. San Luis, Antipolo City 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's Crestwood Phase 3 Bayugo-Buliran, Brgy. San Luis, Antipolo Project 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 Crestwood Phase 3 Bayugo-Buliran, Brgy. San Luis, Antipolo 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 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. CITaSA 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. 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.