BIR Ruling No. 324-13

August 28, 2013 BIR RULING NO. 324-13 E.O. 226; RR 16-2011; Secs. 57 (B); 106 (A) (1) (a); 196 NIRC; BIR Ruling No. 334-11 Communities Cebu, Inc. Mezzanine Floor, Starmall Complex EDSA cor. Shaw Blvd. Mandaluyong City Attention: Atty. Cecilia A. Ramilo Tax Department Head Gentlemen : This refers to your letter dated January 22, 2013 stating that Communities Cebu, Inc. (Communities Cebu for brevity) with Tax Identification No. 001-136-659-000 is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) under Company Reg. No. 187020. It is registered with the Board of Investments (BOI) as an Expanding Developer of a Low-Cost Mass Housing Project (Camella Talamban Brgy. Pit-os, Cebu City) on a Non-Pioneer status under the Omnibus Investments Code of 1987 or Executive Order (EO) No. 226. Communities Cebu has been granted Income Tax Holiday (ITH) by the BOI under Certificate of Registration No. 2013-017 dated January 21, 2013 for a period of three (3) years from January 2013 or actual start of commercial operations/selling, whichever is earlier but in no case earlier than the date of registration. Communities Cebu's Camella Talamban Brgy. Pit-os, Cebu City Project is registered with Housing and Land Use Regulatory Board (HLURB) under Certificate of Registration No. 23926 and holds HLURB License to Sell No. 26279; and under the Specific Terms and Conditions of its BOI Registration, Communities Cebu shall construct and sell one hundred twenty (120) units of low-cost mass housing for Camella Talamban Brgy. Pit-os, Cebu City Project based on the following schedule: IEaCDH Year Volume (No. of Units) 1 35 2 55 3 30 Total 120 === 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 Communities Cebu, 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 Communities Cebu's Camella Talamban Brgy. Pit-os, Cebu City Project is a BOI registered project, this Office is of the opinion as it hereby holds, that income payments received by Communities Cebu in connection with its housing project, Camella Talamban Brgy. Pit-os, Cebu City Project (on the 120 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 January 2013 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, Communities Cebu's Camella Talamban Brgy. Pit-os, Cebu 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. ADETca Moreover, the entitlement to ITH of Communities Cebu's Camella Talamban Brgy. Pit-os, Cebu 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. 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 96.79% 96.72% 96.81% b. Job Generation Pre- Year Year 2 Year op 1 3 Employees 2 34 64 41 c. Investments and Timetable Activity Schedule Related Cost Expense/s (In Php'000) Land acquisition December 2010 Land cost 21,711 Secure necessary October 2012 to Pre-operating 2,229 license/permit/registration February 2013 expenses from the government/training costs Site preparation and December 2012 Land/site 35,001 development to November development 2015 House construction January 2013 to House 59,428 December 2015 construction Start of commercial January 2013 Working 5,000 operation capital Total Project Cost 123,369 ======= d. Sales Revenues Year Volume (No. of Value (Php'000) Units) 1 35 80,856 2 55 126,456 3 30 69,089 Total 120 276,401 === ======= 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. IDTHcA 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. cDEHIC 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, Communities Cebu's Camella Talamban Brgy. Pit-os, Cebu City Project was clearly granted a 3-year ITH but such terms and conditions do not provide for any exemption from other taxes that Communities Cebu may be subject to on its business transactions. Thus, Communities Cebu's Camella Talamban Brgy. Pit-os, Cebu 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. 2 Thus, only the sales by Communities Cebu's Camella Talamban Brgy. Pit-os, Cebu 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 Communities Cebu's Camella Talamban Brgy. Pit-os, Cebu 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, Communities Cebu's Camella Talamban Brgy. Pit-os, Cebu City 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, Communities Cebu's Camella Talamban Brgy. Pit-os, Cebu City 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. ITScHa 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. 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.