BIR Ruling No. 265-2016

REPUBLICOFTHE PHILIPPINES

DEPARTMENT OF FINANCE

t BUREAU OF INTERNAL REVENUE

SN Quezon City

Y

E.O.226;RR 16-201

Secs.57(B): 106(A(1)(a):196 NIRC

BIR Ruling No.334-

265-2016

6-22-2016

SM DEVELOPMENT CORPORATION

5tFloor Two E-Com Center,Harbor Drive Mall of Asia Complex.Brgy.76,Zone 10,CBP-1A Pasay City

Attention: CECILIA R.PATRICIO

Authorized Representative

Gentlemen:

This refers to your letter dated March 05. 2015 stating that SM Development

Corporation (SMDC' for brevity with Tax Identification No. is a domestic

corporation duly registered with the Securities and Exchange Commission (SEC) under

Developer of Low-Cost Mass Housing Project (Shine Residences - Meralco Avenue, Brgy. Company RegNo. It is registered with the Board of Investments (BOI as a New

Ugong, Pasig City) on a Non-Pioneer status under Certificate of Registration No.

dated September 20, 2013. SMDC has been granted Income Tax Holiday (ITH) by the BOI for

a period of three (3) years from September 2013 or actual start of commercial operations/selling.

whichever is earlier but in no case earlier than the date of registration. SMDC's Shine

Residences -Meralco Avenue, Brgy.Ugong,Pasig City Project is registered with Housing

and Land Use Regulatory Board (HLURB) Expanded National Capital Region Field Office,

particularly described as follows:

Registration No. Certificate of License to Sell No. Name of Project/Location No.of Saleable Lots Maximum Selling Price

Meralco Avenue,Brgy Shine Residences --- Ugong,Pasig City 892 residential units / 222 parking slots n/a

Under the Specific Terms and Conditions of its BOI Registration, the ITH of SMDC shall

cover only eight hundred thirteen (813) units of low-cost mass housing for SMDC's Shine

Residences -Meralco Avenue,Brgy.Ugong,Pasig City Project.

On the basis of the foregoing. you now request for an opinion on the tax consequences of

the said ITH granted by BOI.Specifically,if SMDC, being a BOI-registered enterprise is

exempt from the payment of the creditable withholding tax (CWT) imposed under Revenue

Regulations No. 2-98 on income payments received during the aforementioned period with

respect to its registered activity.

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

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income payments to persons enjoying exemption from the income tax provided by Republic Act No.7916 and the Omnibus Investments Code of 1987 1997, as amended. the withholding tax prescribed in the said Regulations shall not apply to

exceeding Three Million Pesos (P3.000.000.00). In the computation of ITH. interest income from in-house financing shall not be considered as revenues generated from the registered that income payments received by SMDC in connection with its housing project, Shine September 2013 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 CWT covers only income directly attributable to revenues generated from the registered activity. SMDC's Shine Residences Meralco Avenue,Brgy. Ugong,Pasig City Project involving 813 low-cost mass housing units used solely for family home or dwelling purposes and not for commercial purposes such as leasing, retail stores, offices, etc. Furthermore. such exemption shall not cover revenues from units with selling price activity. Residences -Meralco Avenue, Brgy. Ugong,Pasig City (on the 813 low-cost mass housing from CWT under RR No. 2-98, as amended by RR No. 6-2001, for a period of 3 years from Pasig City Project is a BOI registered project, this Office is of the opinion as it hereby holds. units as mentioned in the Specific Terms and Conditions of its BOI Registration), is exempt Accordingly, since SMDC's Shine Residences -Meralco Avenue, Brgy.Ugong

Brgy. Ugong, Pasig City Project is not automatic as it still has to comply with the following provisions of the Specific Terms and Conditions of their BOI Registration,viz: Moreover, the entitlement to ITH of SMDC's Shine Residences -- Meraleo Avenue,

1.In the grant of incentives, the extent of the project's ITH entitlement shall be based on extent of economic benefits represented by the proponent at the time of its application. The enterprise shall comply with the following representations: measured capacity.The Board may reduce the ITH if the project does not realize the 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; (4)

a.Net Value Added (NVA) should be at Ieast 25%

NVA Pre-OP 94% 94% Y 62% Y2 94% Y3

b.Job Generation

Total Employees 508 YO Number of Employees 1.100 Y 1,100 Y2 508 Y3

c. Investments and Timetable

Land acquisition Activity May 2009 Schedule Land cost Expenses Related (In PhP'000) Cost

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Total Project CostTPC Capital Equipment Start of Commercial Secure necessary from the government/training costs Site preparation and Building construction Operations license/permit/registration development Acquisition June 2016 October 2009 to to June 2016 November 2012 to June 2016 May 2013 to September 2013 June 2010 November 2012 Building equipment Pre-operating Land/site development cost construction cost Cost of capital Working capital expenses

d.Sales Revenues

Year (No. of Units) Volume 714 99 (PhP'000) Value

3

Total c 813

exceeding 10% of the projected gross revenue represented by the firm in its Net income qualified for ITH availment shall not be a result of gross revenues application.

The enterprise should endeavor to undertake meaningful and sustainable Corporate Social Responsibility (CSR) activities in the locality where the project is implemented.

3 The enterprise shall maintain books of account for this registered project separate

from all its other operation/s and/or activity/ies.

4 File an application with the BOI Incentives Department within one (1) month from be accompanied by a certification by SSS that the enterprise is in good standing in the remittances of SSS contributions of its employees. Further, any request for extension of the reckoning date of ITH availment should be filed prior to the scheduled date or within ninety (90) days from the occurrence of the fortuitous events and/or government delays. 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

5 Secure a Certificate of ITH Entitlement (CoE) from the BOI Legal Service prior to the

filing of ITR with the BIR; otherwise ITH for that particular taxable year without CoE shall be forfeited.

6. In the event the enterprise fails to maintain the 75:25 debt-equity ratio requirement. it delivered to buyers prior to availment of ITH. Otherwise, the enterprise shall not be shall show proof that the construction of housing units have been completed and

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entitled to ITH and shall be required to refund any capital equipment incentives

availed of.

The enterprise shall submit proof of compliance that it has developed socialized

housing project using either of the following schemes, otherwise, the ITH for that

particular taxable year shall be deemed forfeited: a.Investment:20% of total saleable area (estimated at 3.875 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 P 34.730 M); or

i40% ofITH

The investment scheme may be complied with through any of the following modes: (1) Development of a new settlement directly undertaken by the registered entity: (2 Slum upgrading: and (3 Development of a new settlement through joint venture agreements with cither: a Local Government Unit. the National Housing Authority a subsidiary of the BOI-registered entity,or a developer accredited by the HLURB.

Compliance with the 20% socialized housing requirement must be completed within the Under the Direct Participation Scheme, the Developer shall make contribution to an ITH availment period and should be proportionate to the numher of low-cost housing units being applied for ITH for taxable year.

8.The enterprise must commit to the tenets of Good Corporate Governance

those granted under E.O. 226.In this regard, under the terms and conditions of its BOI registration,SMDC's Shine Residences -Meralco Avenue,Brgy.Ugong,Pasig City Project was clearly granted a 3-year ITH but such terms and conditions do not provide for any exemption from other taxes that SMDC may be subject to on its business transactions.Thus. SMDC's Shine Residences --Meralco Avenue,Brgy.Ugong,Pasig City Project will remain subject to Value-Added Tax (VAT) and Documentary Stamp Tax (DST) on its sales of house and lot units pursuant to Sections 106 (A)(1)(a) and 196 of the Tax Code of 1997. as amended. (BIR Ruling No.334-11 dated September 7,2011) Furthermore, BOI-registered enterprises enjoy no tax exemption/privileges other than

--Meralco Avenue, Brgy. Ugong,Pasig City Project of housing units with selling price of not valued at Three Million One Hundred Ninety Nine Thousand Two Hundred Pesos (P3.199,200.00) and below is VAT-exempt'. Thus, only the sales by SMDC's Shine Residenees more than the aforementioned price ceilings shall be exempt from VAT. sale of residential lot valued at One Million Nine Hundred Nineteen Thousand Five Hundred Pesos (P1.919.500.00) and below, or house and lot and other residential dwellings In relation thereto, Section 109 (1)(P) of the Tax Code of 1997 provides, that the

as amended, using the electronic system for filing and payment of taxes of the BIR. Furthermore. returns and pay its tax liabilities, on or before the deadline as provided under the 1997 Tax Code. Pursuant to Section 4 of Republic Act (RA) No. 10708, SMDC is required to file its tax

covered by Section 109(P).(Q) and (V) of the 1997 Tax Code took effect on January 1,2012.pursuant to I The increase in the threshold amount for the sale or lease of goods or properties or the performance of services

Revenue Regulations No.16-2011 dated October 27.2011.

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SMDC shall file with BOI a complete annual tax incentives report of its income-based tax incentives,value-added tax (VAT) and duty exemptions,deductions,credits or exclusions from the tax base.as may be provided under E.O.226.within thirty (30 days from the deadline for filing of tax returns and payment of taxes.

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. 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 It should be understood that SMDC shall be constituted as a withholding agent for the

with the Annual infornation Return under oath, stating its gross income and expenses incurred following the close of its accounting period of a Profit and Loss Statement and Balance Sheet during the taxable year. Likewise. SMDC is required to file on or before the 1sth day of the fourth month

tax exemption or tax incentives and its tax liability, if any, pursuant to Section 235 of the Tax 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 Code of 1997, as amended. Finally, SMDC's books of accounts and other pertinent records shall be subject to

considered null and void. upon investigation it will be disclosed that the facts are different. then this ruling shall be This ruling is being issued on the basis of the foregoing facts as represented. However, if

Very tru ly yours.

Commissioner of Internal Revenue KIM S.JACINTO-HENARES

K-1-GPS 042149 JUN 1 7 2016