BIR Ruling No. 365-13

October 1, 2013 BIR RULING NO. 365-13 E.O. 226; RR 16-2011; Secs. 57 (B); 106 (A) (1) (a); 196 NIRC; BIR Ruling No. 334-11 ProHomes Development, Inc. 14th Floor Ayala Life-FGU Bldg., Mindanao Ave., Cor. Biliran Rd., Cebu Business Park, Ayala, Cebu City Attention: Gladeys Jill A. Santos-Cua Practitioner Gentlemen : This refers to your letter dated February 19, 2013 stating that ProHomes Development, Inc. ( "ProHomes" for brevity) with Tax Identification No. 235-410-503-000 is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) under Company Reg. No. CS200430279. It is registered with the Board of Investments (BOI) as a New Developer of a Low-Cost Mass Housing Project (Fleur de Ville Subdivision Brgy. Mactan, Lapu-Lapu City) on a Non-Pioneer status under Certificate of Registration No. 2011-279 dated December 26, 2011 in accordance with the Omnibus Investments Code of 1987 or Executive Order (EO) No. 226. ProHomes has been granted Income Tax Holiday (ITH) by the BOI for a period of four (4) years from December 2011 or actual start of commercial operations/selling, whichever is earlier but in no case earlier than the date of registration. ProHomes' Fleur de Ville Subdivision Brgy. Mactan, Lapu-Lapu City Project is registered with Housing and Land Use Regulatory Board (HLURB) under Certificate of Registration No. 20738 and holds HLURB License to Sell No. 21769; and under the Specific Terms and Conditions of its BOI Registration, ProHomes shall construct and sell two hundred sixty nine (269) units of low-cost mass housing for ProHomes' Fleur de Ville Subdivision Brgy. Mactan, Lapu-Lapu City Project based on the following schedule: HTCAED Year Volume (No. of Units) Value (P'000) 1 51 65,866 2 65 83,947 3 70 90,405 4 83 107,194 Total 269 347,412 === ====== 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 ProHomes, 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 ProHomes' Fleur de Ville Subdivision Brgy. Mactan, Lapu-Lapu City Project is a BOI registered project, this Office is of the opinion as it hereby holds, that income payments received by Prohomes in connection with its housing project, Fleur de Ville Subdivision Brgy. Mactan, Lapu-Lapu City (on the 269 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 four (4) years from December 2011 or 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 CWT covers only income directly attributable to revenues generated from its registered activity, ProHomes' Fleur de Ville Subdivision Brgy. Mactan, Lapu-Lapu City Project. Furthermore, such exemption shall not cover revenues from units with selling price exceeding Two Million Five Hundred Pesos (P2,500,000.00). (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. Moreover, the entitlement to ITH of ProHomes' Fleur de Ville Subdivision Brgy. Mactan, Lapu-Lapu 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 depend on the enterprise's compliance with the following representations/commitments under this registration. 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, in terms of the foregoing representations/commitments, among others. cHaDIA a. Net Value Added (NVA) should be at least 25% PhP Values in Thousands Total Construction Cost 173,707 Cost of Imported components/materials 3,656 NVA 98% b. Employment Generation Year 1 Year 2 Year 3 Year 4 Total 235 235 235 235 Employees c. Multiplier Effect The enterprise shall show proof of forward and backward industry linkages. d. Investments and Timetable Activity Schedule Related Cost Expense/s (In Php'000) Site acquisition completed Land cost 36,344 Obtained appropriate Completed Application 1,500 license/agreement/permit fees from the government Site preparation and Completed Land/site 36,468 development development House construction On-going Construction 173,707 materials Start of commercial December Working 1,772 operation 2011 capital Total Project Cost 249,791 ======= e. Sales Revenues Year Volume (No. of Value (Php'000) Units) 1 51 65,866 2 65 83,947 3 70 90,405 4 83 107,194 Total 269 347,412 === ======= Income qualified for ITH availment shall be allowed up to 10% more than the projected income represented by the enterprise in its application provided the projects's actual investments and employment approximate the enterprise's representations in its application. Request/s for adjustment of projected income may be submitted to the Board within the entitlement period. In cases where the projects's actual revenues exceed the projections in its application, the Board may increase the projects's ITH availment proportionately for reasons such as but not limited to (a) additional investments; (b) increase in selling price; (c) additional employment and/or increase in number of working shifts. AHcDEI 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, ProHomes' Fleur de Ville Subdivision Brgy. Mactan, Lapu-Lapu City Project was clearly granted a 4-year ITH but such terms and conditions do not provide for any exemption from other taxes that ProHomes may be subject to on its business transactions. Thus, ProHomes' Fleur de Ville Subdivision Brgy. Mactan, Lapu-Lapu 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. 1 Thus, only the sales by ProHomes' Fleur de Ville Subdivision Brgy. Mactan, Lapu-Lapu 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 ProHomes' Fleur de Ville Subdivision Brgy. Mactan, Lapu-Lapu 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 at 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. EcHIAC Likewise, ProHomes' Fleur de Ville Subdivision Brgy. Mactan, Lapu-Lapu 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, ProHomes' Fleur de Ville Subdivision Brgy. Mactan, Lapu-Lapu 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. 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. 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.