Anticipated ‘rise’ in condo living

The growing number of condominium projects in the country can be attributed to the emerging connotation of Filipinos that living in a condo unit suggests a chic contemporary lifestyle (apart, of course, from the belief that maintenance is trouble-free). Unfortunately, this “trouble-free” maintenance that is referred to may no longer be true as the adjunct overhead, particularly the dues or fees to be paid for  maintenance, is anticipated to rise as well.

Living in a condominium unit or “condo living” has generated interests from many Filipinos because of the hassle-free maintenance of the facilities and amenities available in the building. These include the usual 24/7 security, swimming pools, gym, lounge area, etc. These advantages and privileges being enjoyed by unit owners (who as well are automatic shareholders or members of a condominium corporation) are already taken care of by the condominium corporations (condo corps).

Condo corps are usually organized as a non-stock, non-profit entity intended to promote and protect the best interest and welfare of the unit owners as well as to adopt measures to maintain the use and enjoyment of all the property within the condominium project.

To fund the expenses spent for these functions, condo corps are constrained to charge necessary fees or dues to the unit owners. Said charged amount is basically a ballpark figure of the expenses condo corps pay for common expenses such as taxes, licenses, insurance premiums, utilities charges, and fees for the daily operations such as but not limited to the costs and expenses for providing security guards, janitorial, and in general for keeping up the cleanliness and orderliness of the common areas.

Previously, the dues or fees being assessed by condo corps from its members and tenants were not includible in its gross income. The said dues or fees were rather considered merely as held in trust by the condo corps, which are to be used solely for administrative expenses, utilities and maintenance of the condominium’s common areas for the benefit of the member-owners and from which condo corps, as held by the Bureau of Internal Revenue (BIR) in numerous rulings, do not realize any gain or profit.

The above understanding is used by numerous condo corps where some have even applied for their respective BIR rulings, to assure that the funds were not subject to additional taxes also to protect the unit owners from additional costs.

Last Oct. 31, 2012, however, the BIR issued Revenue Memorandum Circular No. 65-2012, where it made an unexpected turnaround from its previous interpretation. The said circular considers association fees or dues of condo corps as subject to income tax and value-added tax (VAT).

The BIR deemed that the dues, fees, and other assessments collected by condo corps from unit owners are considered part of the gross income of the former. In considering said dues or fees as part of its gross income, the BIR declared that the association dues, membership fees, and other charges collected by condo corps constitute income payments or compensation for the beneficial services it provides to its members and tenants, for tax purposes. In addition, since the condo corps are subject to income tax, income payments made are subject to applicable withholding taxes under the existing regulations. The previous interpretation that assessment dues are funds which are merely held in trust by a condominium corporation was reversed due to lack of legal basis.

Concomitantly, the BIR subjected the said dues or fees to VAT given that said dues or fees constitute compensation for the beneficial services that the condo corps provide to its unit owners, following Section 105 of the National Internal Revenue Code 1997 (Tax Code). Simply put, said association dues, membership fees and other assessments /charges collected by condo corps are now subject to VAT.

While noting the BIR’s current perspective, an examination of the purposes why condo corps are organized may be instructive in the characterization of the dues/fees being assessed from the member-owners. They are governed primarily by the Condominium Act, particularly on the matter relating to its organization, formation, management, dissolution and denial of appraisal rights from its stockholders. Condo corps are organized for limited purposes, such as holding title to the common areas, to manage the project, and to such other purposes as may be necessary, incidental or convenient to the accomplishment of said purposes. According to the previous interpretation of the BIR, these statutory restrictions, are imperative factors in determining whether or not condo corps, “in the course of trade or business”, render services to their member-owners, which they manage and act as trustees for.

Nonetheless, given the current stance of the BIR regarding the taxability of the membership fees and/or association dues of the condo corps, the following measures can be considered by the parties adversely affected by the said issuance.

First, the condo corps may consider updating the status of their registrations with the BIR i.e. their Certificate of Registrations should now include as applicable tax types income tax, expanded withholding tax and VAT. Since condo corps are now considered as profit oriented entities, they will now be required to file the annual income tax return (rather than the Profit and Loss Statement and Balance Sheet with the Annual Information Return). Condo corps will also be obliged to pay for the annual registration fees for which they were previously exempted since they were considered as non-profit oriented entities before.

Furthermore, since condo corps will now have to be VAT-registered entities, they are now required to file monthly VAT declarations and quarterly VAT returns, with the necessary attachments. In addition, the condo corps have to observe the VAT invoicing requirements under the Tax Code.  In any case, the condo corps, once they are already VAT-registered, may enjoy the benefit of claiming the input tax credits.

Expectedly, unit owners will not be able to get away from this. They have to get ready for the rise in the costs that their respective condo corps will assess them of, to put into consideration the current viewpoint of the BIR.

Rey T. Llesol is a supervisor from the Tax Group of Manabat Sanagustin & Co. (MS&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The view and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or MS&Co. For comments or inquiries, please email [email protected] or [email protected].