BIR Ruling No. 502-14

December 29, 2014 BIR RULING NO. 502-14 E.O. 226; Secs. 57(B); 106(A)(1)(a); 196 NIRC; BIR Ruling No. 334-2011 A.J. Ledesma Construction Corporation No. 22, Lopez Commercial Arcade Jaro, Iloilo City Attention: Engr. Alexander J. Ledesma Gentlemen: This refers to your letter dated September 12, 2014 requesting a certificate of tax exemption from income and expanded withholding taxes for its low-cost mass housing project, Eagle Crest Condominium-Mission Road Extension, Lapaz, Iloilo City on account of its registration with the Board of Investments (BOI) under Executive Order No. 226, otherwise known as the "Omnibus Investments Code of 1987". It is represented that A.J. LEDESMA CONSTRUCTION CORPORATION, with Tax Identification No. (TIN) 000-103-232-002, 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. 67744; that the Corporation is primarily engaged in the real estate business; that at present, it is a developer of a low-cost mass housing project, Eagle Crest Condominium located at Mission Road Extension, Lapaz Iloilo City; that the said project (owned by Elias H. Jercos) is registered with the Board of Investments per Certificate of Registration No. 2013-066 dated March 13, 2013 under the Omnibus Investments Code of 1987 (E.O. 226); that the Corporation shall be entitled to income tax holiday (ITH) for the above-project for a period of four (4) years beginning from January 2014 or actual start of commercial operations/selling, whichever is earlier, but in no case earlier than the date of registration; that the ITH of the Corporation shall be limited only to the revenue generated from the registered housing project, Eagle Crest Condominium-Mission Road Extension, Lapaz Iloilo City ;and that the aforesaid project is duly registered with the Housing and Land Use Regulatory Board (HLURB) under Certificate of Registration No. 23515 and License to Sell No. 25742 (for 100 units). A.J. LEDESMA CONSTRUCTION CORPORATION, under the Specific Terms and Conditions of its BOI Registration for Eagle Crest Condominium-Mission Road Extension, Lapaz Iloilo City housing project, is obligated to construct and sell Ninety (90) low-cost mass housing units based on the following schedule: TcEaDS Year Volume (No. of Value (P'000) Units) 1 72 100,906 2 18 25,226 Total 90 126,132 == ===== 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 Eagle Crest Condominium-Mission Road Extension, Lapaz Iloilo City , is a BOI registered housing project, this Office is of the opinion as it hereby holds, that income payments received by A.J. LEDESMA CONSTRUCTION CORPORATION in connection with the sale of 90 low-cost housing units in 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 four (4) years beginning from January 2014 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 the revenues generated from 90 low-cost housing units in the A.J. LEDESMA CONSTRUCTION CORPORATION's registered housing project, Eagle Crest Condominium-Mission Road Extension, Lapaz Iloilo City .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 ). 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, A.J. LEDESMA CONSTRUCTION CORPORATION's entitlement to ITH for its housing project, Eagle Crest Condominium-Mission Road Extension, Lapaz Iloilo 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) 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 materialize the extent of economic benefits represented by the proponent at the time of its application. The enterprise shall comply with the following representations: HaAISC a. Net Value Added should be at least 25% (PhP000) Ave. Yr-1 Yr-2 NVA 95.55% 98.73% 86.37% b. Job Generation Number of Employee Yr-1 Yr-2 Yr-3 Yr-4 Total Employees 47 47 11 9 c. Investments and Timetable Activity Schedule Related Cost (Month/Year) Expenses (Php'000) 1. Land Acquisition October 2011 Land Cost 9,576 2. Secure necessary November Pre- 95 license/permit/registration 2011 to Operating from the August 2012 Expenses government/training costs 3. Site Preparation and May to June Land/Site 10,795 Development 2012 Development Cost 4. Building Construction June 2012 to Building 79,839 December Construction 2013 Cost 5. Capital Equipment July 2013 - 2,800 6. Start of Commercial January 2014 Working 2,244 Operations Capital Total Project Cost 105,349 ====== d. Sales Revenues Year Volume (No. of Value (P'000) Units) 1 72 100,906 2 18 25,226 Total 90 126,132 ===== Net income that exceeds 10% of the revenue represented at the time of application shall not be eligible to ITH unless the Board is informed in writing by the proponent in advance before the revenue is expected to exceed the projections in the application for registration submitted to the Board. (3) The enterprise shall maintain a book of account for the registered project separate from all its other operation/s and/or activity/ies. (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 rails 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. (7) The enterprise shall submit proof of compliance that it has developed the socialized housing project using either of the following schemes, otherwise, the ITH for that particular year shall be deemed forfeited: a. Investment: 20% of total saleable area (estimated at 430.58 sq.m.);or b. Direct Participation Scheme (at the option of the registered developer): i. 30% x (20% of the Building Construction Cost) (estimated at Php4.790M);or ii. 40% of ITH. The investment scheme may be complied with through any of the following mode: (1) New Settlement; (2) Slum Upgrading; and (3) Joint-Venture Projects with either the local government units or any of the government housing agencies. Under the Direct Participation Scheme, the Developer shall make contribution to an accredited NGO/institution engaged in socialized housing and community development projects. ESaITA Compliance with the 20% socialized housing requirement must be completed within the ITH availment period and should be proportionate to the number of low-cost housing units being applied for ITH for the taxable year. (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 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. 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, A.J. LEDESMA CONSTRUCTION CORPORATION was clearly granted a 4-year ITH for its project, Eagle Crest Condominium-Mission Road Extension, Lapaz Iloilo City , 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, A.J. LEDESMA CONSTRUCTION CORPORATION 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 ) DEHaAS 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 A.J. LEDESMA CONSTRUCTION CORPORATION of 90 housing units with selling price of not more than the aforementioned price ceiling shall be exempt from VAT. It should be understood that A.J. LEDESMA CONSTRUCTION CORPORATION shall be constituted as a withholding agent for the government if it acts as employer and any of its employees received 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, A.J. LEDESMA CONSTRUCTION CORPORATION 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, A.J. LEDESMA CONSTRUCTION CORPORATION'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 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 Bureau 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 .