BIR Ruling No. 364-12

May 31, 2012 BIR RULING NO. 364-12 E.O. 226; RR 2-98; BIR Ruling No. 334-2011 Property Company of Friends, Inc. PROFRIENDS CENTER, 55 Tinio St., Brgy. Addition Hills, Mandaluyong City Attention: Ms. Girlie B. Seco OIC-Realty Services Division Gentlemen : This refers to your letter dated May 27, 2010 requesting for a ruling on the tax consequences of the Income Tax Holiday (ITH) granted to Property Company of Friends, Inc. ("PRO-FRIENDS") 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 three (3) years from the start of commercial operations/selling. Documents submitted disclosed that PRO-FRIENDS, with Taxpayer Identification No. 201-981-861-000, is registered with the BOI as an Expanding Developer of Low-Cost Mass Housing Projects on a Non-Pioneer status; that it is the developer of the following mass housing projects located in the Province of Cavite, particularly: Project Name Location BOI Date of BOI Start of No. of Reg. No. Registration Commercial Units Operation/ITH Lancaster Brgy. Alapan, 2010-081 April 21, 2010 April 2010 468 Residences Phase 2 Imus, Cavite Lancaster Brgy. Alapan, 2010-080 April 21, 2010 April 2010 160 Residences Phase 3 Imus, Cavite Lancaster Brgy. Alapan, 2010-082 April 21, 2010 April 2010 328 Residences Phase 4 Imus, Cavite Lancaster Brgy. Alapan, 2010-109 June 1, 2010 June 2010 880 Residences Phase 5 Imus, Cavite Lancaster Brgy. Alapan, 2010-110 June 1, 2010 June 2010 351 Residences Phase 6 Imus, Cavite that under their respective BOI Terms and Conditions, the following projects shall construct and sell units of low-cost mass housing units based on the following schedule: Project Name Year No. of Units Value (P '000) LANCASTER RESIDENCES 1 180 135,000 PHASE 2 2 180 135,000 3 108 81,000 Total 468 351,000 LANCASTER RESIDENCES 1 54 54,000 PHASE 3 2 53 54,000 3 53 12,000 Total 160 120,000 LANCASTER RESIDENCES 1 110 82,500 PHASE 4 2 110 82,500 3 108 81,000 Total 328 246,000 LANCASTER RESIDENCES 1 300 225,000 PHASE 5 2 300 225,000 3 280 210,000 Total 880 660,000 LANCASTER RESIDENCES 1 117 87,750 PHASE 6 2 117 87,750 3 117 87,750 Total 351 263,250 == ====== that PRO-FRIENDS LANCASTER RESIDENCES PHASES 2, 3, 4, 5 & 6 Brgy. Alapan, Imus, Cavite are registered with the Housing and Land Use Regulatory Board (HLURB) under following Certificates of Registration and were issued Licences to Sell, to wit: Project Name Location HLURB HLURB Maximum Certificate of License to Sell No. Selling Registration No./ /Date Issued Price Date Issued Lancaster Brgy. Alapan, 21521 / 22618/ P1,250,000 Residences Phase Imus, Cavite July 2, 2009 July 2, 2009 2 Lancaster Brgy. Alapan, 21526/ 22623/ P1,250,000 Residences Phase Imus, Cavite July 2, 2009 July 2, 2009 3 Lancaster Brgy. Alapan, 21339/ 22524/ P1,250,000 Residences Phase Imus, Cavite March 25, 2010 March 25, 2010 4 Lancaster Brgy. Alapan, 21732/ 22969/ P1,250,000 Residences Phase Imus, Cavite January 12, 2010 January 12, 2010 5 Lancaster Brgy. Alapan, 21719/ 22955/ P1,250,000 Residences Phase Imus, Cavite December 21, 2009 December 21, 2009 6 that according to the Terms and Conditions of their respective BOI Registrations, PRO-FRIENDS' LANCASTER RESIDENCES PHASES 2, 3, 4, 5 & 6 Brgy. Alapan, Imus, Cavite, is entitled to ITH for a period of three (3) years from April 2010 or June 2010 (whichever is applicable) or the actual start of commercial operations/selling whichever is earlier but in no case earlier than the date of registration; that PRO-FRIENDS' LANCASTER RESIDENCES PHASES 2, 3, 4, 5 & 6 Brgy. Alapan, Imus, Cavite's ITH shall be limited only to the revenue generated from the registered projects; and that revenues from units with selling price exceeding P3.0M shall not be covered by ITH. In reply, please be informed that under Section 2.57.5 (B) (2) of Revenue Regulations 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 PRO-FRIENDS' LANCASTER RESIDENCES PHASES 2, 3, 4, 5 & 6 Brgy. Alapan, Imus, Cavite are BOI-registered projects, this Office is of the opinion as it hereby holds, that income payments received by PRO-FRIENDS in connection with its low-cost mass housing project LANCASTER RESIDENCES PHASES 2, 3, 4, 5 & 6 Brgy. Alapan, Imus, Cavite are exempt from the creditable withholding tax imposed under RR No. 2-98, as amended by RR No. 6-2001, for a period of three (3) years from April 2010 or June 2010 (whichever is applicable) or the 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 creditable withholding tax covers only revenues generated from the registered activities, PRO-FRIENDS' LANCASTER RESIDENCES PHASES 2, 3, 4, 5 & 6 Brgy. Alapan, Imus, Cavite. Furthermore, such exemption shall not cover revenues with selling price exceeding Three Million Pesos (P3,000,000.00). (BIR Ruling No. 334-2011 dated September 7, 2011) Moreover, the entitlement of PRO-FRIENDS' LANCASTER RESIDENCES PHASES 2, 3, 4, 5 & 6 Brgy. Alapan, Imus, Cavite to ITH is not automatic as each project has to comply with Section 10 of the Specific Terms and Conditions of its pertinent BOI Registration, viz.: (1) Secure from HLURB an endorsement that it has complied with the approved development plan and "Certificate of Good Housekeeping"; (2) File an application with the BOI Incentives Department within one (1) month from the filing of the final ITR with the 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 or its employees; and (3) Secure a Certificate of ITH Entitlement (CoE) from the Supervision and Monitoring Department (SMD) of BOI prior to filing the Income Tax Return with the BIR, otherwise ITH for that particular taxable year without CoE is 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 their respective BOI registrations, PRO-FRIENDS' LANCASTER RESIDENCES PHASES 2, 3, 4, 5 & 6 Brgy. Alapan, Imus, Cavite were clearly granted 3-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, PRO-FRIENDS' LANCASTER RESIDENCES PHASES 2, 3, 4, 5 & 6 Brgy. Alapan, Imus, Cavite 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 provides that "the sale of residential lot valued at One Million Five Hundred Thousand Pesos (P1,500,000.00) and below, or house and lot and other residential dwellings in the amount of Two Million Five Hundred Thousand Pesos (P2,500,000.00) and below" ; 1 is VAT-exempt. Thus, only the sales by PRO-FRIENDS (LANCASTER RESIDENCES PHASES 2, 3, 4, 5 & 6 Brgy. Alapan, Imus, 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 PRO-FRIENDS (LANCASTER RESIDENCES PHASES 2, 3, 4, 5 & 6 Brgy. Alapan, Imus, Cavite) 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 RR 2-98, as amended. Likewise, PRO-FRIENDS (LANCASTER RESIDENCES PHASES 2, 3, 4, 5 & 6 Brgy. Alapan, Imus, Cavite) are 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 your gross income and expenses incurred during the taxable year. Finally, PRO-FRIENDS (LANCASTER RESIDENCES PHASES 2, 3, 4, 5 & 6 Brgy. Alapan, Imus, Cavite) 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. Effective January 1, 2012, the adjusted threshold amounts of sales of real properties exempt from VAT stated in 109 (1) (P) pursuant to Revenue Regulations No. 16-2011, are as follows : Sale of residential lot valued at P1,919,500.00 and below, Sale of house & lot and other residential dwellings valued at P3,199,200.00 and below where the instrument of sale/transfer/disposition was executed on or after January 1, 2012.