VAT, condo taxes to pad owners’ dues?

CONDO TAXES: The Bureau of Internal Revenue circular clarifying the taxability of condominium and homeowners association dues, membership fees and other charges may need further clarification for plain folk who may not understand what will hit them in the new year.

In her Revenue Memorandum Circular 65-2012, BIR Commissioner Kim Henares said “the gross receipts of condominium corporations including association dues, membership fees, and other assessments/charges are subject to value-added tax (and) income tax.”

While the basic issues are publicized and debated, maybe collection of said taxes should be suspended or restrained by court action or administrative order. Later, the pertinent laws may be amended.

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QUESTIONS: The BIR circular, dated Oct. 31, 2012, has raised questions from homeowners and condo-owners already reeling from taxes and impositions left and right. Some of the issues:

• Why should homeowners dues be VATable when they are not collected in the regular course of business? In the first place, are the dues correctly categorized as income and therefore taxable?

• Is it not double taxation on the same income — assuming it is income — to slap VAT on association dues collected, then to tax them again at income-tax filing time?

• How can associations whose collections and incomes are taxed be stopped from passing on the tax burden to their members and thus raising the latter’s expenses? (This point is reminiscent of Manila Electric Co. [Meralco] passing to electricity consumers the taxes it has paid.)

• Is it true that homeowners associations and condominium corporations in some affluent villages have been exempted from paying the same VAT and income tax levied on common subdivisions and housing projects? If so, why?

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PRIOR EXEMPTIONS: In the past, the BIR had exempted from income tax the same association dues now being taxed. Reason given then was that the money collected was merely held in trust to be used for administrative expenses incurred in servicing members.

In previous circulars, the BIR held that those administrative expenses went solely to operating and maintaining the condominium. The corporation was deemed to be not realizing any gain or profit from its use of the collections from members and tenants.

The same prior rulings also exempted association dues from VAT as the corporation was considered not selling, bartering, exchanging or leasing any goods and neither rendering any service for a fee but merely holding in trust the dues collected.

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BENEFICIAL SERVICES: But in her RMC 65-2012, Henares said that the previous interpretation that the funds were merely held in trust by the corporation “lacks legal basis and is hereby abandoned” effective immediately.

She added that since a condominium corporation is — in her view — liable for income tax on members’ dues, income payments made to it are subject to withholding tax.

Henares explained that dues paid to the corporation form part of its taxable gross income because “a condominium corporation furnishes its members and tenants with benefits, advantages, and privileges in return for such payments.”

She added: “The association dues, membership fees, and other assessments or charges collected… constitute income payments or compensation for beneficial services it provides to its members and tenants.”

An earlier issuance (RMC 35-2012, Aug. 6, 2012), by the way, has also subjected to VAT and income tax the membership fees and association dues collected by clubs organized and operated exclusively for pleasure, recreation and other non-profit purposes.

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CODE CITED: On why association dues are VATable, Henares pointed to Section 105 of the National Internal Revenue Code which says that “any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, render services… shall be subject to the value-added tax.”

The code adds: “The phrase ‘in the course of trade or business’ means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person… is a non-stock, non-profit private organization (irrespective of the disposition of its net income).”

She said that the duty to pay VAT was affirmed by the Supreme Court in GR No. 125355, March 30, 2000, where the tribunal ruled:

“VAT is a tax on transactions, imposed at every stage of the distribution process on the sale, barter, exchange of goods or property, and on the performance of services, even in the absence of profit….

“…it is immaterial whether the primary purpose of a corporation indicates that it receives payment… on a reimbursement-on-cost basis only, without realizing profit… as long as the entity provides service for a fee, remuneration or consideration.”

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WHY EXEMPTIONS?: The BIR circular did not contain any paragraph that could be construed as exempting from VAT the association or condominium dues of affluent villages.

A hint of a reason may be found in Section 18 of RA 9904 (Magna Carta for Homeowners and Homeowners’ Associations) which reads: “Where the LGUs lack resources to provide for basic services, the associations shall endeavor to tap the means to provide for the same. In recognition of the associations’ efforts to assist the LGUs in providing such basic services, association dues and income derived from rentals of their facilities shall be tax-exempt: Provided, That such income and dues shall be used for the cleanliness, safety, security, and other basic services needed by the members, including the maintenance of the facilities of their respective subdivisions or villages.”

In the case of Forbes Park and nearby exclusive villages, the LGU referred to is Makati City which is clearly not lacking in resources to provide essential services to the exclusive villages.

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