BIR Ruling No. 474-11

December 5, 2011 BIR RULING NO. 474-11 E.O. 226; Secs. 57 (B); 106 (A) (1) (a); 109 (1) (P); 196 NIRC; BIR Ruling No. 334-11 Sayuno Mendoza & San Jose Law Offices Suite 806 Park Trade Center Madrigal Business Park Muntinlupa City Attention: Lucien E. Sayuno Gentlemen : This refers to your letter, dated January 6, 2011, requesting on behalf of CDC Realty, Inc.'s housing project, Manila Rivercity Residences-Delas Alas Street, Sta. Ana, Manila ("CDC-Manila Rivercity Residences") , for exemption from income and creditable withholding taxes pursuant to Revenue Regulations No. 2-98, as amended, on account of the housing project's registration with the Board of Investments (BOI) under Executive Order No. 226, otherwise known as the "Omnibus Investments Code of 1987". Documents submitted show that CDC Realty, Inc., with Tax Identification Number (TIN) 006-342-505-000, is registered with the Board of Investments (BOI) under Executive Order (E.O.) No. 226, otherwise known as the "Omnibus Investments Code of 1987" per Certificate of Registration No. 2010-026, dated January 27, 2010, as New Developer of Low Cost Mass Housing Project, (CDC-Manila Rivercity Residences) on a non-pioneer status; that pursuant to said registration, its project is entitled to income tax holiday (ITH) incentive for a period of four (4) years from March 2010 or actual start of commercial operations/selling, whichever is earlier but in no case earlier than the date of registration; that under the Specific Terms and Conditions of its BOI Registration, CDC Realty, Inc. shall construct and sell One Thousand Five Hundred Ninety Three (1,593) units of low-cost mass housing based on the following revised schedule: CSTHca Year Volume (No. of Units) 1 385 2 402 3 393 4 317 5 96 Total 1,593 ==== 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 the Omnibus Investments Code of 1987. aIcCTA Accordingly, since CDC-Manila Rivercity Residences , is a BOI registered project, this Office is of the opinion as it hereby holds, that income payments received by CDC Realty, Inc. in connection with the aforementioned housing project, CDC-Manila Rivercity Residences , are exempt from the creditable withholding tax imposed under RR No. 2-98, as amended by RR No. 6-2001, for a period of four years starting from June 12, 2008. It must be emphasized, however, that the above exemption from the creditable withholding tax covers only revenues generated from the registered activity, CDC-Manila Rivercity Residences. Furthermore, such exemption shall not cover revenues from units with selling price exceeding Three Million pesos (P3,000,000.00). ( BIR Ruling No. 334-2011 dated September 7, 2011). Moreover, CDC-Manila Rivercity Residences's entitlement to ITH is not automatic as it has still to comply with Sections 10 (a), 11, 12, 13, and 14 of the Specific Terms and Conditions of the BOI Registration, to wit: (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 Incentives 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; (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 shall be required to refund any capital equipment incentives availed of; (5) Prior to availment of ITH and subject to HLURB Certification, the enterprise shall submit a proof of compliance that, at least twenty percent (20%) of the total condominium area or total condominium project cost, has been developed and allocated for socialized housing within the same city or municipality, whenever feasible and in accordance with other existing laws. The total subdivision project cost may also be complied with any of the following manner viable in the city or municipality: (1) New Settlement; (2) Slum Upgrading; (3) Community Mortgage Program; and (4) Joint-Venture Projects. Otherwise, the ITH for that particular taxable year shall be deemed forfeited; HCTEDa (6) 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 (7) 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, Production Costs, 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, CDC-Manila Rivercity Residences was clearly granted a 4-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, CDC-Manila Rivercity Residences 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 five hundred thousand pesos (P1,500,000) and below or house and lot, and other residential dwellings valued at two million five hundred thousand pesos (P2,500,000) and below is VAT-exempt. Thus, only the sales by CDC-Manila Rivercity Residences of housing units with selling price of not more than the aforementioned price ceiling shall be exempt from VAT. It should be understood that CDC-Manila Rivercity Residences 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, CDC-Manila Rivercity Residences 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, CDC-Manila Rivercity Residences'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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue