BIR Ruling No. 352-13

September 11, 2013 BIR RULING NO. 352-13 E.O. 226; RR 2-98; BIR Ruling No. 546-12; BIR Ruling No. 334-11 Borland Development Corporation 2nd Floor, Metrobank Bldg., Old Nat'l Hi-way, Balibago, Sta. Rosa, Laguna 4026 Attention: Mr. Ramiro R. Dimas Assistant General Manager Gentlemen : This refers to your letter dated January 31, 2013, requesting for the issuance of a Ruling on the tax consequences of the Income Tax Holiday (ITH) granted to BORLAND DEVELOPMENT CORPORATION by the Board of Investments (BOI) under Executive Order (EO) No. 226 otherwise known as the "Omnibus Investments Code of 1987", for a period of four (4) years from the start of commercial operations/selling. Documents submitted disclosed that BORLAND DEVELOPMENT CORPORATION, with Taxpayer's Identification No. (TIN) 001-008-417-000, is registered with the BOI as a New Developer of Low-Cost Mass Housing Project on a Non-Pioneer status; that it is the developer of the following mass housing project: Project Location BOI Reg. Date of BOI Start of No. of Name No. Registration Commercial Units Operation/ITH Berkeley Brgy. Pulong, 2012-191 September September 2012 95 Heights Sta. Cruz, Sta. 14, 2012 Subdivision A Rosa, Laguna that under its BOI Terms and Conditions, the following project shall construct and sell units of low-cost mass housing units based on the following schedule: TcHDIA Project Name Year No. of Units Value (PhP) Berkeley Heights Subdivision A 1 19 14,383,508 2 43 32,362,893 3 33 25,171,139 Total 95 71,917,540 that Berkeley Subdivision A located at Brgy. Pulong, Sta. Cruz, Sta. Rosa, Laguna is registered with the Housing and Land Use Regulatory Board (HLURB) under the following Certificate of Registration and was issued License to Sell, to wit: Project Name Location HLURB Certificate HLURB License of Registration No./ to Sell No./Date Date Issued Issued Berkeley Heights Brgy. Pulong, 23641/March 20, 25308/March 20, Subdivision A Sta. Cruz, Sta. 2012 2012 Rosa, Laguna that according to the Specific Terms and Conditions of its BOI Registration, BORLAND DEVELOPMENT CORPORATION (Berkeley Heights Subdivision A Brgy. Pulong, Sta. Cruz, Sta. Rosa, Laguna) is entitled to ITH for a period of four (4) years from September 2012 or the actual start of commercial operations whichever is earlier, but in no case earlier than the date of registration; that BORLAND DEVELOPMENT CORPORATION (Berkeley Heights Subdivision A Brgy. Pulong, Sta. Cruz, Sta. Rosa, Laguna)'s ITH shall be limited only to the revenue generated from the registered project; and that revenues from units with selling price exceeding P2.50M shall not be covered by ITH. In reply, please be informed that under Section 2.57.5 (B) (2) of Revenue Regulations 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 BORLAND DEVELOPMENT CORPORATION (Berkeley Heights Subdivision A Brgy. Pulong, Sta. Cruz, Sta. Rosa, Laguna) is a BOI-registered project, this Office is of the opinion that income payments received by BORLAND DEVELOPMENT CORPORATION in connection with the sale of units in its low-cost mass housing project Berkeley Heights Subdivision A Brgy. Pulong, Sta. Cruz, Sta. Rosa, Laguna are exempt from the creditable withholding tax imposed under RR No. 2-98, as amended by RR No. 6-2001, for a period of four (4) years from September 2012 or the actual start of commercial operations whichever is earlier but in no case earlier than the date of registration. 1 It must be emphasized, however, that the above exemption from creditable withholding tax covers only income directly attributable to revenues generated from the registered activity, Berkeley Heights Subdivision A Brgy. Pulong, Sta. Cruz, Sta. Rosa, Laguna . Furthermore, such exemption shall not cover revenues from units with selling price exceeding Two Million Five Hundred Thousand Pesos (P2,500,000.00) . (BIR Ruling No. 546-12 dated August 30, 2012) HIEAcC Moreover, the entitlement of BORLAND DEVELOPMENT CORPORATION (Berkeley Heights Subdivision A Brgy. Pulong, Sta. Cruz, Sta. Rosa, Laguna) to ITH is not automatic as such project has to comply with Items 4, 7 a (i) (ii) (iii) (v), 9, 10, 11 and 12 of the Specific Terms and Conditions of its pertinent BOI Registration, viz. : (1) In the grant of incentives, the extent of the project's ITH entitlement shall be based on 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; Sales Revenues Year Volume Value (No. of units) (PhP) 1 19 14,383,508 2 43 32,362,893 3 33 25,171,139 Total 95 71,917,540 ==== ========= 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. aCIHcD (2) Only income directly attributable to revenue generated from the registered project (Berkeley Heights Subdivision A Brgy. Pulong, Sta. Cruz, Sta. Rosa, Laguna) shall be qualified for ITH. Revenues from units with selling price exceeding P2.50M shall not be covered by ITH. For this purpose, the enterprise shall submit audited segregated income statements for this registered project. Net income from operation of registered activity shall be certified under oath by CEO or CFO; (3) The enterprise shall submit the list of cost items common to all its projects/activities (whether BOI or not-BOI-registered) and the methodology adopted in allocating the common costs between the registered activity/ies and non-registered activity/ies. The methodology to be adopted in depreciation for fixed Assets particularly the Plant, Property and equipment account shall be the Straight Line depreciation method; (4) The interest Expense on the enterprise's liabilities shall be appropriately allocated between the registered activity/ies and the non-registered activity/ies; (5) The enterprise shall secure from HLURB an endorsement that it has faithfully complied with the approved development plan and a " Certificate of Good Housekeeping "; (6) An application should be filed with the BOI Incentives Department within one (1) month from the filing of the final ITR with BIR in order to validate the claim for income tax exemption. The application shall be accompanied by a certification by SSS that the enterprise is in good standing in the remittance of SSS contributions of its employees. Any request for extension of the reckoning date of ITH availment should be filed prior to the scheduled date or within ninety (90) days from the occurrence of fortuitous events and/or government delays; CHEIcS (7) The enterprise must secure a Certificate of ITH Entitlement (CoE) from the BOI Supervision and Monitoring Department (SMD) prior to filing the Income Tax Return (ITR) with the Bureau of Internal Revenue (BIR), otherwise, ITH for that particular taxable year without CoE is forfeited; (8) In the event the enterprise fails to maintain the 75:25 debt-to-equity requirement, it shall show proof that the construction of housing units have been completed and delivered to the 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 1,598.70 sq.m.) or total subdivision project cost (estimated at P7.99M), 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: (1) New Settlement; (2) Slum upgrading; and (3) Joint-Venture Projects. Otherwise, the ITH for that particular taxable year shall be deemed forfeited; (10) The enterprise shall ensure (a) that its contractors are duly licensed by the Philippine Contractors Accreditation Board (PCAB) as required under Republic Act No. 4566 ("Contractors License Law"), and (b) that any construction activity, under its project and supervision, shall be undertaken in accordance with the rules and regulations prescribed by PCAB as well as all applicable laws; and CADHcI (11) The enterprise shall submit to the BOI Supervision and Monitoring Department, on a semestral basis within fifteen (15) days from the end of each semester, a report on actual investments, employment, sales, production costs and other information that the Board may require at any given time with respect to the registered project. Furthermore, BOI-registered enterprises enjoy no tax exemption/privileges other than those granted under E.O. 266. In this regard, under the terms and conditions of its BOI registration, BORLAND DEVELOPMENT CORPORATION (Berkeley Heights Subdivision A) was clearly granted 4-year ITH but such terms and conditions do not provide for any exemption from other taxes that it may be subject to on its business transactions. Thus, BORLAND DEVELOPMENT CORPORATION (Berkeley Heights Subdivision A Brgy. Pulong, Sta. Cruz, Sta. Rosa, Laguna) 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 the computation of ITH, interest income from in-house financing shall not be considered as part of the revenues generated from the registered activity. 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. Thus, only the sales by BORLAND DEVELOPMENT CORPORATION (Berkeley Heights Subdivision A Brgy. Pulong, Sta * of housing units with selling price of not more than the aforementioned price ceiling shall be exempt from VAT. It should be understood that BORLAND DEVELOPMENT CORPORATION (Berkeley Heights Subdivision A Brgy. Pulong, Sta. Cruz, Sta. Rosa, Laguna) 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 at source as required under Chapter XIII and Section 57 of the Tax Code of 1997, as amended and implemented by RR No. 2-98, as amended. aDTSHc Likewise, BORLAND DEVELOPMENT CORPORATION (Berkeley Heights Subdivision A Brgy. Pulong, Sta. Cruz, Sta. Rosa, Laguna) 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, BORLAND DEVELOPMENT CORPORATION (Berkeley Heights Subdivision A Brgy. Pulong, Sta. Cruz, Sta. Rosa, Laguna) 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. 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.