BIR Ruling No. 407-13

November 11, 2013 BIR RULING NO. 407-13 E.O. 226; Secs. 57 (B); 106 (A) (1) (a); 196 NIRC; BIR Ruling No. 334-2011 Property Company of Friends, Inc. PROFRIENDS CENTER, 55 Tinio St. Brgy. Addition Hills, Mandaluyong City Attention: Marilyn T. Santos Financial Control Group Head Gentlemen : This refers to your letter dated 06 March 2013 requesting on behalf of Property Company of Friends, Inc. ("Pro-Friends") , certificate of tax exemption from income and expanded withholding taxes on its income derived from the low-cost housing project, Kensington Phase 1-Brgy. Navarro, General Trias, Cavite , duly registered with the Board of Investments (BOI) under Executive Order No. 226, otherwise known as the "Omnibus Investments Code of 1987". DcIHSa Documents submitted show that Pro-Friends , with Tax Identification No. (TIN) 201-981-861-000, is a domestic corporation duly organized under the Philippine laws; that it is registered with the Securities and Exchange Commission (SEC) bearing SEC Certificate of Registration No. A199902864 dated 23 February 1999; that the primary purpose for which Pro-Friends was organized is to own, use, improve, develop, subdivide, sell, exchange, lease, and hold for investment or otherwise, real estate of all kinds, including buildings, houses, apartments and other structures; that at present, Pro-Friends has a low-cost mass housing project, Kensington Phase 1-Brgy. Navarro, General Trias, Cavite , which has been duly registered with the Board of Investments (BOI) under the Omnibus Investments Code of 1987 (E.O. 226), bearing BOI Certificate of Registration No. 2012-157; that the Corporation shall be entitled to income tax holiday (ITH) for the aforesaid project for a period of three (3) years beginning from August 2012 or actual start of commercial operations/selling, whichever is earlier, but in no case earlier than the date of registration; that the project is duly registered with the Housing and Land Use Regulatory Board (HLURB) under Certificate of Registration No. 24302 and License to Sell No. 26047 pursuant to Batas Pambansa 220; and that the ITH of the Corporation shall be limited only to the revenue generated from the registered housing project, Kensington Phase 1-Brgy. Navarro, General Trias, Cavite . It is further shown that Pro-Friends , under the Specific Terms and Conditions of its BOI Registration for the above housing project, is obligated to construct and sell Three Hundred Eighty Seven (387) low-cost mass housing units based on the following prices and schedules: Name of Project Year Sales Volume (No. of Units) Sales Value (PhP) 1. Kensington Phase 1 1 129 154,800,000 2 129 154,800,000 3 129 154,800,000 Total 387 464,400,000 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. (BIR Ruling No. 334-2011 dated September 7, 2011) Accordingly, since Kensington Phase 1-Brgy. Navarro, General Trias, Cavite is duly registered with the BOI under the Omnibus Investments Code of 1987, this Office is of the opinion as it hereby holds, that the income payments received by Pro-Friends in connection with the aforementioned housing project, 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 beginning from August 2012 or actual start of commercial operations/selling, whichever is earlier, but in no case earlier than the date of registration of the housing project with the BOI. DAEICc It must be emphasized, however, that the aforesaid exemption from the creditable withholding tax covers only the revenues derived by Pro-Friends from the project, Kensington Phase 1-Brgy. Navarro, General Trias, Cavite . Furthermore, such exemption shall not cover revenues from units with selling price exceeding Two Million Five Hundred Pesos (Php2,500,000.00). * (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 housing project. Moreover, Pro-Friends ' entitlement to ITH for its BOI-registered housing project is not automatic as it has still to comply with the provisions of the Specific Terms and Conditions of its BOI Registration, viz. : (1) The enterprise shall submit proof of verified compliance with the socialized housing requirement for its seven (7) housing projects (The Cedar Village, California West Hills Phase 6, Parc Regency E, Lancaster Villages Phase 1, Montecillo Villas Phase 1, The Cedar Residences Phase 3, The Cedar Residences Phase 2) registered under the 2010 IPP, prior to ITH availment and to be completed within the ITH entitlement period; (2) 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. In the event that the registered enterprise fails to implement the projects 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 should be at least 25% Year 1 Year 2 Year 3 Total Construction Cost 54,180,000 54,180,000 54,180,000 (Php) Cost of Raw Materials 2,746,539 2,746,539 2,746,539 (Php) NVA (%) 95% 95% 95% b. Job Generation aICHEc Year 1 Year 2 Year 3 Employees paid on monthly 10 10 10 basis Workers paid on a daily basis - - - Full-time workers paid by 115 115 115 contractors Others (Managers and 3 3 3 Supervisors) Total 128 128 128 === === === c. Investments and Timetable Activity Schedule Related Cost (Php) Expense/s 1. Site/Land Acquisition April 2010 Raw Land 17,000,000 Cost 2. Obtaining appropriate July 2011 to Pre- 1,500,000 license/agreement/permit June 2012 Operating from the government Expenses 3. Site Preparation and June 2011 to Land 25,000,000 Development August Development - Hiring of contractors 2011 Cost - Completion of site preparation and development 4. House Construction March 2012 House 162,540,000 to January Construction 2016 Cost 5. Start of Commercial August Working 6,500,000 Operations 2012 Capital Total Project Cost 212,540,000 ========= d. Sales Revenues Year Sales Volume Sales Value (No. of Units) (P'000) 1 129 154,800,000 2 129 154,800,000 3 129 154,800,000 Total 387 464,400,000 === ========= 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. In cases where the project's actual revenues exceed the projections in its application by more than 10%, the Board may increase the project's ITH availment proportionately for reasons such as but not limited to (a) additional investments; (b) new markets/orders; (c) additional employment and/or increase in number of working shifts. Request/s for adjustment of projected income may be submitted to the Board within the ITH entitlement period. (3) Secure from the Housing and Land Use Regulatory Board (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 Incentive Department within one (1) month from the 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 taxable year without CoE shall be forfeited; (6) In the event the enterprise fails to maintain the 75:25 debt-to-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; EScAID (7) The enterprise shall submit proof of compliance that, at least twenty percent (20%) of the total subdivision area (estimated at 7,779 sq.m.) or total subdivision project cost (estimated at Php42.508 million) has been developed and allocated for socialized housing within one year from date of registration or prior to availment of ITH, whichever is earlier. Otherwise, the ITH for that particular taxable year shall be deemed forfeited; (8) The enterprise shall ensure (a) that its contractors are duly licensed by the Philippine Contractors Accreditation Board (PCAB) as required under Republic Act 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 (9) 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 and other information that the Board may require at anytime with respect to the registered project starting on date of registration. 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, Pro-friends was clearly granted a 3-year ITH for its project, Kensington Phase 1-Brgy. Navarro, General Trias, Cavite , but such terms and conditions do not provide for any exemption from other taxes that the Corporation may be subject to on its business transactions. Thus, Pro-Friends 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 Nine Hundred Nineteen Thousand Five Hundred Pesos (P1,919,500) 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) and below, is VAT-exempt. 1 Thus, only the sales by the Corporation of housing units with selling price of not more than the aforementioned price ceiling shall be exempt from VAT. DTIaCS It should be understood that Pro-Friends 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 (RR) No. 2-98 , as amended. Likewise, Pro-Friends 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, Pro-Friends ' 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 is 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 amounts 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.