BIR Ruling No. 440-13

November 26, 2013 BIR RULING NO. 440-13 E.O. 226; Secs. 57 (B); 106 (A) (1) (a); 196 NIRC; BIR Ruling No. 334-2011 Ipads Developers, Inc. 5/F Citibank Center, 8741 Paseo De Roxas Makati City Attention: Roland Young President Gentlemen : This refers to your letter dated May 27, 2013 requesting on behalf of IPADS Developers, Inc. a certificate of tax exemption from income and expanded withholding taxes on its income derived from its condominium project registered with the Board of Investments (BOI) under Executive Order No. 226, otherwise known as the "Omnibus Investments Code of 1987". DISTcH Documents submitted show that IPADS Developers, Inc. (the " Company "), with Tax Identification No. (TIN) 007-819-193-000, is a domestic corporation duly organized under the Philippine laws; that the Corporation is registered with the Securities and Exchange Commission (SEC) bearing SEC Certificate of Registration No. CS201011116; that the Company is primarily engaged in the real estate business; that at present, it has a low-cost mass condominium project called Dian Place located at 1720 Dian St., Brgy. Palanan, Makati City ; that the said condominium project has been registered with the Board of Investments per Certificate of Registration No. 2011-263 dated December 8, 2011 as a new developer of low-cost mass housing project on a non-pioneer status under the Omnibus Investments Code of 1987 (E.O. 226); that the Company shall be entitled to income tax holiday (ITH) for the condominium project for a period of three (3) years beginning from June 2012 or actual start of commercial operations/selling, whichever is earlier, but in no case earlier than the date of registration; that a Certificate of ITH Entitlement dated March 8, 2013 was issued in savor of IPADS Developers, Inc. for taxable year 2012; that the ITH of the Company shall be limited only to the revenue generated from the registered housing project, Dian Place-Makati 1720 Dian St., Brgy. Palanan, Makati City ; and that the said project is duly registered with the Housing and Land Use Regulatory Board (HLURB) under Certificate of Registration No. 22939 and License to Sell No. 25009 pursuant to Batas Pambansa 220. The Company, under the Specific Terms and Conditions of its BOI Registration for Dian Place-Makati 1720 Dian St., Brgy. Palanan, Makati City project, is obligated to construct and sell fifty (50) condominium units based on the following schedule: Year Volume (Units) Value (P'000) 1 19 37,205 2 16 32,231 3 15 30,380 Total 50 99,816 === ====== 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) DTCSHA Accordingly, since Dian Place-Makati 1720 Dian St., Brgy. Palanan, Makati City is a BOI registered condominium project, this Office is of the opinion as it hereby holds, that income payments received by IPADS Developers, Inc. in connection with the aforementioned project, are exempt from the creditable withholding tax imposed under RR No. 2-98, as amended by RR No. 6-2001, for a period three (3) years beginning from June 2012 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 the creditable withholding tax covers only income directly attributable to the revenues generated from the Company's registered condominium project, Dian Place-Makati 1720 Dian St., Brgy. Palanan, Makati City , involving fifty (50) units. 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. 334-2011 dated September 7, 2011), as well as revenues from one (1) commercial unit and four (4) parking slots in that condominium project. In the computation of ITH, interest income from in-house financing shall not be considered as part of the revenues generated from the registered activity. Moreover, the Corporation's entitlement to ITH for its project, Dian Place-Makati 1720 Dian St., Brgy. Palanan, Makati City , is not automatic as it has still to comply with the provisions of the Specific Terms and Conditions of the BOI Registration, viz. : (1) 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"; (2) 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; (3) 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; aSTHDc (4) The enterprise shall maintain the 75:25 debt-to-equity requirement prior to availment of ITH. Otherwise, the enterprise shall not be entitled to ITH and any capital equipment incentive availed of shall be refunded accordingly; (5) 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; (6) The enterprise shall submit to the BOI Supervision and Monitoring Department, on a quarterly basis within fifteen (15) days from the end of each quarter, 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; and (7) The grant of incentives including the ITH Rate of Exemption 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 projects 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: a. Net Value Added should be at least 25% Year 1 Year 2 Year 3 Construction Cost (Php'000) 13,110 11,040 10,350 Raw Materials (bathroom and kitchen 735 619 580 fixtures) (Php'000) NVA 94% 94% 94% b. Employment Generation Year 1 Year 2 Year 3 Direct Labor 40 50 55 Indirect Labor 5 8 8 Administrative/Sales 3 4 4 Total 48 62 67 === === === c. Investments and Timetable SECAHa Activity Schedule Related Cost (Month/Year) Expenses (Php'000) 1. Site Acquisition September 2010 Raw Land Cost 10,500 2. Obtain appropriate January-September Pre-Operating 500 license/agreement/permit 2011 Costs from government agencies 3. Site Preparation and August-September Land 6,810 Clearing 2011 Development 4. Construction of October 2011- Condominium 34,500 Condominium Bldg. October 2012 Units Building 4,800 Equipment 5. Start of Commercial June 2012 Working 2,350 Operation Capital Total Project Cost 59,460 ====== d. Sales Revenues Year Volume (No. of Units) Value (P'000) 1 19 37,205 2 16 32,231 3 15 30,380 Total 50 99,816 === ====== 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 project'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 ITH entitlement period. In cases where the project'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. cIACaT 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, the Company was clearly granted a 3-year ITH for its project, Dian Place-Makati 1720 Dian St., Brgy. Palanan, Makati City , but such terms and conditions do not provide for any exemption from other taxes that the Company may be subject to on its business transactions. Thus, the Company will remain subject to Value-Added Tax (VAT) and Documentary Stamp Tax (DST) on its sales of condominium 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 Company of housing units with selling price of not more than the aforementioned price ceiling shall be exempt from VAT. It should be understood that the Company 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, the Company is required to file on or before the 15th day of the fourth month following the close of your 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, the Company'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 you have been complying with the conditions under which you have been granted tax exemption or tax incentives and your 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. aDSHCc 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.