Greenfield Development Corporation

February 13, 2008 BIR RULING [DA-086-08] 57 (B), 105; DA-593-99 Greenfield Development Corporation Greenfield Corporate Centre 98 United St., Mandaluyong City Attention: Ms. Carloine R. Rodriguez Comptroller Gentlemen : This refers to your letter dated September 5, 2006 stating that Greenfield Development Corporation (GDC), is a domestic corporation organized to primarily deal and engage in real estate business and is at present leasing commercial spaces at EDSA Central Complex, that as an incident to the operation of its business 1. GDC incurs common area maintenance expenses, including but not limited to electricity, air conditioning, water, janitorial, security, repairs and maintenance. As an industry practice, these expenses are billed by the utility or service providers ( i.e. Meralco, Maynilad and GDC's contractors), in which case GDC will issue billing statement to its tenants to charge the above expense at cost on a pro-rata basis; 2. In the case of direct utilities and services, these are expenses directly attributable to a tenant. For example, in case of repairs and maintenance ascribed to a tenant's stall, the contractor for the repairs will send a statement of account to GDC for the services rendered, that in turn, GDC will issue a billing statement to that tenant for the expense incurred; 3. For the electricity, LPG and water, GDC maintains a mother meter which indicates the total utility consumption to be paid by GDC for a certain period and GDC would initially advance the payment to the utility companies and would then subsequently issue a billing statement to its tenants using the individual sub-meters maintained by each tenant as basis; ASHEca 4. No input tax related to the reimbursement shall be claimed by GDC. 5. The utility charges paid are allocated to each tenant based on actual consumption but, nonetheless, does not constitute money or income received by GDC. You are of the opinion that reimbursement of expenses, by its very nature, is not income but merely a return of capital and therefore not subject to income tax since GDC never received any income from the transaction which can be the subject of any tax (as clarified by Ms. Arlene Espiritu, GDC issues acknowledgment receipt for the monies received from the tenants for the above-mentioned cost/expenses). Based on the foregoing, you request for a confirmation that: a) The monies received by GDC from its tenants as payments for direct utilities and services are not subject to Value-Added Tax (VAT) and Expanded Withholding Tax (EWT). b) The monies received by GDC from its tenants as payment for Common Area Maintenance (CAM) expenses are not subject to VAT and EWT. In reply, please be informed that the payments received by GDC from its tenants constituting the allocated share in the common costs or expenses and the billings made by GDC at costs without any mark-up and which do not result in any gain or profit should not be subjected to withholding tax. The said activity is rendered without any added fee and is done merely to ensure administrative and operational efficiency of the commercial spaces. The mode of advancing the payment and subsequently collecting the same from the tenants as trustee of the fund intended for payment of expenses for the common areas and utilities of the spaces is simply an implementation of GDC's administrative function. Hence, this manner of collection should likewise not be subjected to VAT, since GDC in this regard does not sell, barter, exchange nor lease any goods or property and neither does it render any utility services nor selling of goods, e.g. LPG to the lessees accommodated. ECcTaS Moreover, any payment made by the tenants/lessees to GDC representing the reimbursable costs or expenses shall not form part of the gross receipts of GDC and therefore not an income subject to EWT and VAT as the said payment is intended for costs of operation, administration, utilities, maintenance and repairs of the common areas of the premises under lease for the benefit of the tenants who are ultimately liable for the same. It has been repeatedly opined by this Office that any payments collected for the benefit of tenants/lessees do not constitute income subject to income tax, but are just funds held in trust for the tenants/lessees. The "trust fund" doctrine was applied in BIR Ruling No. DA-593-99 dated October 7, 1999, to wit: "In connection therewith, you now request for a ruling to the effect that the receipts of the Regular Assessment billed to the unit owners of the condominium building which are used solely for administrative expenses, utilities and maintenance of the common areas do not form part of the . . . Homeowner's Association taxable income subject to income tax and consequently exempt from withholding tax. In reply, please be informed that the . . . Homeowner's Association receipt of the Regular Assessment from the unit owners which are merely held in trust and which are to be used solely for administrative expenses, utilities and maintenance of the common areas for the benefit of the said unit owners and which the . . . Homeowner's Association could not realize any gain or profit as a result of its receipt thereof are not includible in said Corporation's gross income. Hence, the same is not subject to income tax and consequently to the expanded withholding tax." Furthermore, in BIR Ruling No. DA-008-2000 dated January 5, 2000, this Office ruled that the receipt of . . . other assessments/charges collected from the members, which are merely held in trust and which are to be used solely for administrative expenses are not includible in the corporation's gross income, thus not subject to income tax and consequently to the expanded withholding tax. It is worthwhile to mention the following elements that should exist for income to be taxable as enunciated by BIR Ruling No. 029-98 dated March 19, 1998: AcCTaD 1. There must be gain or profit; 2. The gain must be realized or received, actually or constructively; and 3. The gain must not be excluded by law or treaty from taxation. The above-mentioned conditions are not fulfilled by the mere act of collecting charges and assessments, as the said amounts are collected solely to fund administrative, utilities and maintenance expenses of the common areas of a commercial establishment. In the same manner, payments made by GDC's lessees as reimbursements for costs of operation, administration, utilities, maintenance and repairs of the common areas of the Edsa Central Complex are intended to benefit the tenants of the said mall and should not therefore be subject to EWT. Collection of fees and charges from the tenants for the maintenance of common areas does not give rise to a sale of service subject to VAT. In VAT Ruling No. 078-2001 dated October 29, 2001, it was ruled that the activity of collecting such charges from unit owners as 'trustee' of the fund thereof, without any service fee is not subject to VAT. Thus, the issuance of NON-VAT receipts for the same is in order. Considering that GDC does not provide service for a fee, remuneration or consideration, then the service rendered in the collection of direct utilities and services as well as payment for the CAM expenses should also not be subject to the EWT and VAT. Finally, it is hereby emphasized that GDC shall not be entitled to any input VAT attributable to assessments/charges for the costs of operation, administration and utilities of individual lessees/tenants, as well as for the amount/charges for maintenance and repairs of common areas, which amounts were initially billed to GDC by the seller or provider of goods (LPGs) and services. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. cDIHES Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service