BIR Ruling No. 401-15

December 11, 2015 BIR RULING NO. 401-15 E.O. 226; RR 16-2011; Secs. 57 (B); 106 (A) (1) (a); 196 NIRC; BIR Ruling No. 334-11 Cenqhomes Development Corporation Rm. 408 Anita Bldg.,1300 Quezon Avenue, cor. Timog Avenue Quezon City Attention: Victor H. Manarang President Gentlemen : This refers to your letter dated July 14, 2015 stating that Cenqhomes Development Corporation (Cenqhomes for brevity) with Taxpayer's Identification No. 230-799-534-000 is a corporation duly organized and existing under Philippine laws; and that it is registered with the Securities and Exchange Commission (SEC) under Registration No. CS200405510. It is registered with the Board of Investments (BOI) as an Expanding Developer of Economic and Low-Cost Housing Project (Victoria Trails Brgy. San Isidro, Rodriguez, Rizal) on a Non-Pioneer status under Certificate of Registration No. 2015-133 dated July 02, 2015. Cenqhomes has been granted Income Tax Holiday (ITH) by the BOI for a period of three (3) years from July 2015 or actual start of commercial operations/selling, whichever is earlier but in no case earlier than the date of registration. Cenqhomes' Victoria Trails Brgy. San Isidro, Rodriguez, Rizal Project is registered with Housing and Land Use Regulatory Board (HLURB) under Certificate of Registration No. 26112 and holds HLURB License to Sell No. 029905; and under the Specific Terms and Conditions of its BOI Registration, Cenqhomes shall construct and sell three hundred nineteen (319) units of low-cost mass housing for Victoria Trails Brgy. San Isidro, Rodriguez, Rizal based on the following schedule: Year Volume (No. of Units) 1 64 2 223 3 32 Total 319 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 Cenqhomes, 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 Cenqhomes' Victoria Trails Brgy. San Isidro, Rodriguez, Rizal Project is a BOI registered project, this Office is of the opinion as it hereby holds, that income payments received by Cenqhomes in connection with its housing project, Victoria Trails Brgy. San Isidro, Rodriguez, Rizal Project (on the 319 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 July 2015 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 the registered activity, Cenqhomes' Victoria Trails Brgy. San Isidro, Rodriguez, Rizal Project involving 319 low-cost mass housing units. Furthermore, such exemption shall not cover revenues from units with selling price exceeding Three Million Pesos (P3,000,000.00).However, pursuant to HLURB License to Sell No. 029905, the maximum selling price of units in Cenqhomes' Victoria Trails Brgy. San Isidro, Rodriguez, Rizal Project shall be P1,250,000.00 per House and Lot package. 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 Cenqhomes' Victoria Trails Brgy. San Isidro, Rodriguez, Rizal 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. The enterprise shall be required to increase its stockholders' equity from PhP374,659.00 to PhP33,571,246.50 [PhP374,659.00 (Current Equity) + PhP33,196,587.50 (25% of Project Cost)] and shall submit proof of compliance before availment of ITH. Equity shall include paid-up capital stock, additional paid-in capital and unrestricted retained earnings, and restricted retained earnings provided that such is intended for the project. Appraisal surplus and treasury stock should not be included as part of stockholder's equity for this purpose. 2. The enterprise shall submit a duly notarized Affidavit executed by a licensed engineer or architect indicating the area or the number of lots and actual units built and the construction costs on the development of the compliance project for its existing registered projects before availment of ITH. 3. The enterprise shall submit proof of verified compliance with the 20% socialized housing requirement for its existing project before availment of ITH. Non-compliance to the 20% socialized housing requirement of existing projects of a BOI registered enterprise, including projects of its parent corporation and their subsidiaries, shall cause the non-registration of their new housing projects, until the corresponding compliance of the non-complying existing projects are satisfied. 4. 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: (1) net value added, (2) job generation, (3) multiplier effect, and (4) measured capacity. The Board may reduce the ITH if the project does not realize the extent of economic benefits represented by the proponent at the time of its application. The enterprise shall comply with the following representations: a. Net Value Added (NVA) should be at least 25% Year 1 Year 2 Year 3 NVA 98% 98% 98% b. Job Generation Number of Employees Total Pre-op Year 1 Year 2 Year 3 Employees 151 155 450 64 c. Investments and Timetable Activity Schedule Related Cost Expense/s (In Php) Land Acquisition June 2014 Land Cost 36,956,450 Secure necessary January 2014- Pre-operating 2,354,679 license/permit/registration May 2015 expenses from the government/training cost Site preparation and July 2014- Land/site 37,165,471 development August 2015 development House Construction May 2015- House 54,309,750 April 2018 Construction Start of Commercial July 2015 Working 2,000,000 Operations Capital TOTAL 132,786,350 ======= d. Sales Revenues Year Volume (No. of Units) Value (PhP' 000) 1 64 48,009,910 2 223 168,034,685 3 32 24,004,955 Total 319 240,049,550 ========== Net income qualified for ITH availment shall not be a result of gross revenues exceeding 10% of the projected gross revenue represented by the firm. In cases where the project's actual revenues exceed the projections in its application due to e.g., new markets/orders, additional employment/shifts, additional investments, the Board may increase the project's ITH availment proportionately. Request/s for adjustment of projected revenue must be filed before the filing of application for ITH. 5. The enterprise shall submit a list of cost items common to all its projects/activities (whether BOI-registered or non-registered) and methodology adopted in allocating the common costs between the registered and non-registered activity/ies. 6. Secure from the HLURB an endorsement that it has faithfully complied with the approved development plan and a "Certificate of Good Housekeeping". 7. 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. 8. Secure a Certificate of ITH Entitlement (CoE) from the BOI Legal and Compliance Service prior to filing of ITR with the BIR; otherwise, ITH for that particular year without CoE shall be forfeited. 9. 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. 10. The enterprise shall submit proof of compliance that at least twenty percent (20%) of the total subdivision area (estimated at 6,767.60 sq.m.) or total subdivision project cost (estimated at PhP26,557,270) 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 will be done through the development of new settlement directly undertaken by registered entity. Otherwise, the ITH for that particular year shall be deemed forfeited. 11. The enterprise must commit to the tenets of Good Corporate Governance. 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, Cenqhomes' Victoria Trails Brgy. San Isidro, Rodriguez, Rizal Project was clearly granted a 3-year ITH but such terms and conditions do not provide for any exemption from other taxes that Cenqhomes may be subject to on its business transactions. Thus, Cenqhomes' Victoria Trails Brgy. San Isidro, Rodriguez, Rizal 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 Cenqhomes' Victoria Trails Brgy. San Isidro, Rodriguez, Rizal 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 Cenqhomes 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, Cenqhomes 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, Cenqhomes' 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 Sections 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.