Pena Development Company, Inc.

May 9, 2009 BIR RULING [SH-(038) 309-09] RA 7279; S20-074-2007 Pena Development Company, Inc. 23 Dragonfly, Valle Verde 6, Pasig City Attention: Teodoro Q. Pena Chairman of the Board Gentlemen : This refers to your letter dated January 16, 2009 requesting for a ruling that the sale by Pena Development Company, Inc. ("PEDECOM" for brevity) of a parcel of land located at Barangay Sicsican, Puerto Princesa City, Palawan, to the City Government of Puerto Princesa, Palawan, as represented by the City Mayor Hon. Edward S. Hagedorn, is exempt from capital gains tax pursuant to R.A. No. 7279, otherwise known as the Urban Development and Housing Act of 1992. It is represented that PEDECOM is a domestic family-owned corporation that owns several parcels of raw and undeveloped lands in Barangay Sicsican, Puerto Princesa City, Palawan. When Barangay Bagong Pag-asa of Puerto Princesa City, Palawan was totally burned, the victims were initially sheltered at the City Coliseum. Not finding a suitable relocation area, the City Mayor offered to buy one of the undeveloped parcels of PEDECOM in Barangay Sicsican covered by TCT No. 155035 issued by the Register of Deeds of Puerto Princesa containing an area of 50,194 square meters. Subsequent to the choice of the lot, PEDECOM, for its own account, upon request of the city housing division retained a consultant to prepare a subdivision plan of 90 square meter parcels, that the City distributed to those who lost their homes in the fire. Thereafter, PEDECOM constructed the subdivision road network and developed the land for occupancy with the use of City government heavy equipment. In reply thereto, please be informed that pursuant to Section 20 (d) of R.A. No. 7279, which reads: SDHAEC "Sec. 20. Incentives for Private Sector Participating in Socialized Housing. To encourage greater private sector participation in socialized housing and further reduce the cost of housing units for the benefit of the underprivileged and homeless, the following incentives shall be extended to the private sector: xxx xxx xxx "(d) Exemption from the payment of the following: "(1) Project-related income taxes; "(2) Capital gains tax on raw lands used for the project; "(3) Value-Added Tax for the project contractor concerned; "xxx xxx xxx the owner of the raw land is exempt from the payment of capital gains tax on the conveyance of the parcel of land consisting of 50,194 square meters for the use in the aforesaid socialized housing project. Upon application for exemption, a lien on the title of the land shall be annotated by the Register of Deeds having jurisdiction over the property, to the effect that the same is to be applied or is being applied to socialized housing project pursuant to R.A. No. 7279. However, the sale is subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, based on the consideration or the fair market value, whichever is higher. Furthermore, under Revenue Regulations No. 11-97, as amended by Revenue Regulations No. 17-2001, within six (6) months after the issuance of tax exemption from the capital gains tax or creditable withholding tax, the buyer/developer of raw land shall apply with the HLURB or Local Government Unit (LGU) concerned for a permit to develop the property and shall start the development of the socialized housing project within one (1) year after the approval of the Development Permit and issuance of permit. Otherwise, the exemption from the capital gains tax or creditable withholding tax becomes automatically null and void, and the buyer/developer shall be held liable for the payment of taxes that should otherwise have been paid, plus the penalties incident to late payment. Provided, further, that in case of misrepresentation, an additional penalty equivalent to one hundred percent (100%) of the capital gains tax or creditable withholding tax due shall be imposed and paid by the buyer/developer. On the other hand, once the developer is registered with and certified by the HLURB as engaged in socialized housing project pursuant to R.A. No. 7279 and as developer of the property used for the aforementioned socialized housing projects, the sale of the socialized housing units (house and lot or lots only) shall be exempt from project-related income taxes, and creditable expanded withholding tax prescribed under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001, implementing Section 57 (B) of the Tax Code of 1997, as amended. ETDSAc In this connection, it should be mentioned that any sale made by the developer to interested parties other than the principal target beneficiaries under Sections 3 (t) and 16 of R.A. No. 7279, shall not be entitled to the foregoing tax exemption as well as should there be non-compliance with any of the sine-qua-non terms and conditions as aforestated, for tax exemption purposes. It is, however, understood that the Certificate Authorizing Registration (CAR) shall only be issued after it is established upon proper verification by the Revenue District Officer (RDO) concerned that, considering the rules on valuation of real property, the actual selling price per sale transaction of the lots in this case does not really exceed P180,000.00 or P225,000.00, as the case may be, for each qualified beneficiaries (now P400,000.00 per issuance of HUDCC Resolution No. 1-2008 dated December 11, 2008). Finally, Section 109 (P) of the Tax Code of 1997, as amended, provides that sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business of real properties utilized for low-cost and socialized housing as defined by RA 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, shall be exempt from VAT. As such, your sale of the aforestated property to the City Government of Puerto Princesa, Palawan, to be used in its socialized housing project is also exempt from VAT. 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service