BIR Ruling No. 424-11

November 4, 2011 BIR RULING NO. 424-11 E.O. 226; RR 2-98; BIR Ruling No. 334-2011; BIR Ruling No. DA-(IL-026) 426-09; BIR Ruling No. DA-(IL-008) 080-10 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 August 6, 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". 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 Pro-Friends is the project owner and developer of the following mass housing projects located in the province of Cavite, particularly: Project Name Location BOI Reg. Date of BOI Start of No. Registration Commercial Operation/ITH Cedar Residences Brgy. Lantic, 2010-120 June 23, 2010 July 2010 Phase 2 Carmona, Cavite Cedar Residences Brgy. Lantic, 2010-121 June 23, 2010 July 2010 Phase 3 Carmona, Cavite that it shall construct and sell Five Hundred Thirty (530) units of low-cost mass housing units for the project "Pro-Friends-Cedar Residences Phase 2-Brgy. Lantic, Carmona, Cavite" and Seven Hundred Sixty One (761) units of low-cost mass housing units for the project "Pro-Friends-Cedar Residences Phase 3-Brgy. Lantic, Carmona, Cavite" based on the following schedule: CaDSHE Cedar Residences Phase 2 Cedar Residences Phase 3 Year No. of Units No. of Units Value Value (CYPRESS) (CEDAR) (P'000) No. of Units (P'000) 1 137 41 125,300 255 191,250 2 137 41 125,300 255 191,250 3 135 39 122,700 251 191,250 SubTotal 409 121 Total 530 373,300 761 570,750 ==== ====== === ====== that according to the Terms and Conditions of its BOI Registration, "Pro-Friends-Cedar Residences Phase 2-Brgy. Lantic, Carmona, Cavite" and "Pro-Friends-Cedar Residences Phase 3-Brgy. Lantic, Carmona, Cavite" are is entitled to ITH for a period of three (3) years from July 2010 or the actual start of commercial operations/selling whichever is earlier but in no case earlier than the date of registration; that the ITH shall be limited only to the revenue generated from the registered projects "Pro-Friends-Cedar Residences Phase 2-Brgy. Lantic, Carmona, Cavite" and "Pro-Friends-Cedar Residences Phase 3-Brgy. Lantic, Carmona, Cavite"; that revenues from units with selling price exceeding Three Million Pesos (P3.0M) shall not be covered by ITH; that the "Pro-Friends-Cedar Residences Phase 2-Brgy. Lantic, Carmona, Cavite" is registered with the Housing and Land Use Regulatory Board (HLURB) under Certificate of Registration No. 21366 dated July 16, 2009 with HLURB License to Sell No. 22612 dated July 16, 2009; and that "Pro-Friends-Cedar Residences Phase 3-Brgy. Lantic, Carmona, Cavite" is likewise registered with the HLURB under Certificate of Registration No. 21367 dated June 29, 2009 with HLURB License to Sell No. 22613 dated June 29, 2009. In reply, please be informed that under Section 2.57.5 (B) (2) of Revenue Regulations No. 2-98, as amended, implementing Section 57 (B) of the Tax Code of 1997, the withholding tax prescribed in the Regulations shall not apply to income payments to persons enjoying exemption from income tax provided by Republic Act No. 7916 and E.O. 226. (BIR Ruling No. DA-072-98 dated March 11, 1998; BIR Ruling No. DA-(IL-037) 354-08 dated October 24, 2008) Accordingly, since "Pro-Friends-Cedar Residences Phase 2-Brgy. Lantic, Carmona, Cavite" and "Pro-Friends-Cedar Residences Phase 3-Brgy. Lantic, Carmona, 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 projects "Pro-Friends-Cedar Residences Phase 2-Brgy. Lantic, Carmona, Cavite" and "Pro-Friends-Cedar Residences Phase 3-Brgy. Lantic, Carmona, 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 July 2010 or from 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 aforementioned registered projects. Furthermore, such exemption shall not cover revenues with selling price exceeding Three Million Pesos (P3.0M). (BIR Ruling No. DA-(IL-008) 080-10 dated May 28, 2010) . Moreover, the entitlement of "Pro-Friends-Cedar Residences Phase 2-Brgy. Lantic, Carmona, Cavite" and "Pro-Friends-Cedar Residences Phase 3-Brgy. Lantic, Carmona, Cavite" to ITH is not automatic as it has to comply with Section 10 (a) and 9 (a), respectively, of the Specific Terms and Conditions of its BOI Registrations for both projects, viz. : SDECAI (1) Secure from HLURB an endorsement that it has complied with the approved development plan and a "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 its BOI registration, "Pro-Friends-Cedar Residences Phase 2-Brgy. Lantic, Carmona, Cavite" and "Pro-Friends-Cedar Residences Phase 3-Brgy. Lantic, Carmona, Cavite" was clearly granted a 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-Cedar Residences Phase 2-Brgy. Lantic, Carmona, Cavite" and "Pro-Friends-Cedar Residences Phase 3-Brgy. Lantic, Carmona, 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. DA-(IL-010-215-09 dated April 29, 2009) 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 is VAT-exempt. Thus, only the sales by "Pro-Friends-Cedar Residences Phase 2-Brgy. Lantic, Carmona, Cavite" and "Pro-Friends-Cedar Residences Phase 3-Brgy. Lantic, Carmona, 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) HAaScT 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 RR 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 your 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 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