Tagaytay Country Homes II Homeowners' Association Inc.

April 11, 2008 BIR RULING [DA-240-08] S-30; RR 8-2005; DA-390-2006; Tagaytay Country Homes II Homeowners' Association Inc. 2/F Cityland Condominium 10 Tower I 156 H.V. Dela Costa Street Ayala North, Makati City Attention: Ms. Joelyn Lailuddin Corporate Secretary Gentlemen : This refers to your letter dated April 12, 2007 requesting for a ruling confirming the exemption of Tagaytay Country Homes II Homeowners' Association, Inc. (TCH II) from the payment of income tax and value-added tax, as well as from the filing of the corresponding returns pertinent thereto and exemption from the twenty-five percent (25%) withholding tax imposed under Revenue Regulations No. 8-2005. It is represented that TCH II is a non-stock, non-profit association, incorporated and registered with the Home Insurance and Guaranty Corporation on March 14, 1991, under Registration No. 04-1640; that it was organized to promote the best interest, as well as to safeguard the welfare of the homeowners and occupants of Tagaytay Country Homes II located at Brgy. Neogan, Tagaytay City, by maintaining the community and its facilities, and adopting measures, consistent with laws, to enhance and regulate the use and enjoyment by its occupants, of said facilities; that in order to sustain the expenses attributable to its mandate, TCH II, Inc. is constrained to assess obligatory fees/dues from its members/homeowners, which are computed proportionately to their individual membership interest in the subdivision; and that TCH II, Inc. is also in the process of claiming its refund from Meralco. Based on the foregoing, this Office is of the opinion and so holds that TCH II is a corporation organized for social welfare purposes as contemplated under Section 30 (G) of the Tax Code of 1997. Accordingly, it is exempt from the payment of income tax on income received by it as such organization, and therefore, need not file an income tax return concerning such income. However, it is subject to the corresponding internal revenue taxes imposed under the National Internal Revenue Code on its income derived from any of its properties, real or personal or any activity conducted for profit regardless of the disposition thereof, which income should be returned for taxation. Likewise, interest income from currency bank deposits and yield or any other monetary benefit from deposit substitute instruments and from trust funds and similar arrangements, and royalties as derived from sources within the Philippines are subject to the 20% final withholding tax: Provided, however, that interest income derived by it from a depository bank under the expanded foreign currency deposit system shall be subject to 71/2% final withholding tax pursuant to Section 27 (D) (1) in relation to Section 57 (A), both of the Tax Code of 1997. Moreover, it is required to file on or before the 15th day of the fourth month following the end of the accounting period of the taxpayer, a Profit or Loss Statement and Balance Sheet with the Annual Information Return under oath, stating its gross income and expenses incurred during the preceding accounting period and a certificate showing that there has not been any change in its By-Laws, Articles of Incorporation, manner of operation and activities as well as sources and disposition of income. It should be understood that the said exempt organization shall be constituted as withholding agent for the government if it acts as an employer and its employees receive compensation income subject to the withholding tax under Section 79 (A), Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, or if it makes income payments to individuals or corporations subject to the withholding tax pursuant to Section 57 of the Tax Code of 1997, also as implemented by Revenue Regulations No. 2-98. cEaCAH Moreover, Section 105 of the Tax Code of 1997 provides that any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added (VAT) imposed in Sections 106 to 108 of the same Code. 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 engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. Accordingly, if TCH II engaged in the sale of goods or services in the course of a business pursuit, including transactions incidental thereto, in general, it shall also be liable for VAT (BIR Ruling No. S30-27-2003 dated November 21, 2003 & DA-043-2004 dated February 4, 2004). Moreover, the tax exemption granted to it as a non-stock, non-profit corporation under Section 30 of the Tax Code of 1997 covers only income taxes for which it is directly liable. It should be noted that VAT is an indirect tax payable by the seller and not by the purchaser of goods. However, being an indirect tax, it can be shifted or passed on to the buyer/purchaser, transferee or lessee of the goods, properties or services. Once shifted to the buyer/customer as an addition to the cost of goods or services sold, it is no longer a tax but an additional cost which the buyer/customer has to pay in order to obtain the goods or services. Thus, the shifting of the VAT to it does not make it the person directly liable and therefore, it cannot invoke its tax exemption privilege under Section 30 of the Tax Code of 1997 to avoid the passing on or shifting of the VAT. Revenue from contributions and donations, not being derived from sale of services or sale of goods made in the course of business but rather in connection with its non-stock, non-profit activities, is exempt from the 12% VAT. However, the above exemption from the 12% VAT does not extend to its purchase of goods or properties or services and importation of goods. Hence, notwithstanding that it is a non-stock, non-profit corporation, its purchase of goods or properties or services and importation of goods shall nevertheless be subject to the 12% VAT pursuant to Section 107 of the said Code (VAT Ruling No. 119-90 dated May 14, 1990 and BIR Ruling No. DA-043-2004 dated February 4, 2004). It is of course understood that your books of accounts and other pertinent records shall be subject to periodic examination by revenue enforcement officers of this Bureau for the purposes of ascertaining whether you have been complying with the conditions under which you have been granted tax exemption or tax incentives and your tax liability, if any, pursuant to Section 235 of the Tax Code of 1997. EDCTIa Relative to the excess utility payments, in BIR Ruling DA-097-2006 dated March 8, 2006, this Office ruled as follows: "Furthermore, the refund that pertains to the excess utility payments made during the period when SPC was on an ITH is not subject to the 5% gross income tax. SPC will not have any tax benefit from the refund of the excess utility payments. . . . ScaEIT This situation is analogous to the situation in BIR Ruling No. 076-89 dated April 17, 1989, where the BIR said that "the waiver of interest by the banks on non-trade and trade related indebtedness of GMPI is not subject to income tax considering that the deduction of said interest as expense in prior years did not offset nor reduce the taxable income of GMPI since it was in a financial loss position even without the deduction. (Barnhart-Marrow Consolidated vs. Commissioner of Internal Revenue 47 (BTA 590) (Emphasis supplied) When a creditor cancel a debt as part of a business transaction, the debtor is enriched or its net assets has been increased and, therefore, he realized taxable income. (Philippine Fiber Processing Co. vs. CIR, CTA Case No. 1407, December 29, 1966). However, a transaction whereby nothing of exchangeable value comes to or is received by a taxpayer does not give rise to or create taxable income. (Dallas Transfer and Terminal Warehouse Co. vs. Commissioner of Internal Revenue 5 CIR, 70 F 2d 95, 13 AFTR 930). Accordingly, the condonation of GMPI's indebtedness by GM-US is not subject to income tax since before and after the condonation GMPI remains insolvent, i.e. , in a capital deficiency position. . . . ." Thus, SPC is exempt also from the 5% gross income tax under R.A. No. 7916 since the refund of excess utility payments in its favor will not give rise to or create a taxable income." (emphasis supplied) (BIR Ruling No. DA-390-2006 dated June 23, 2006) Applying the foregoing in the instant case, and considering that TCH II is an organization exempt from income tax and it has not been engaged in any profitable activities that would result in the imposition of taxes, thereby it has not claimed the above utility payments as deductions for income tax purposes, the refund of the excess utility payments in its favor, therefore, will not give rise to or create a taxable income. Consequently, said refund is not subject to the withholding tax prescribed under RR No. 8-2005. 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