Makati Executive Tower I, Inc.

April 11, 2008 BIR RULING [DA-243-08] 30 (E), 105, RR 8-2005; S-30-041-2005; DA-746-2006 Makati Executive Tower I, Inc. 2/F Cityland Condominium 10 Tower 1 156 H.V. Dela Costa St., Makati City Attention: Joelyn Lailuddin President Gentlemen : This refers to your letter dated July 09, 2007 requesting for exemption from the payment of income tax, filing of the corresponding income tax return under Section 30 of the Tax Code of 1997, as amended, payment of value-added tax (VAT) and withholding tax on excess utility payments from MERALCO. IcCEDA Documentary evidence submitted to this Office disclosed that Makati Executive Tower I, Inc. ("MET I, Inc." for brevity) is a non-stock, non-profit corporation duly registered with the Securities and Exchange Commission with its Amended Articles of Incorporation under SEC Registration No. CN200255143 dated April 01, 2003; that the non-stock, non-profit corporation was organized pursuant to the mandate of Section 30 of Presidential Decree No. 957 which states that: "The owner or developer of a subdivision project or condominium project shall initiate the organization of a homeowners' association among the buyers and residents of the projects for the purpose of promoting and protecting their mutual interest and assist in their community development." cADaIH MET I, Inc. was organized to promote the best interests, as well as to safeguard the welfare of the unit owners and occupants of the condominium buildings known as Makati Executive Tower I, located at Dela Rosa Street, Pasig City, by maintaining the common areas and its facilities, and adopting measures, consistent with laws, to enhance and regulate the use and enjoyment by its occupants of said building facilities. In order to sustain the expenses attributable to its duties and functions, MET I, Inc. is constrained to assess obligatory fees/dues from its members/unit owners, which are computed proportionately to their individual membership interest in the condominium. In reply, please be informed as follows: INCOME TAX Based on the foregoing, this Office is of the opinion and so holds that is a corporation organized for mutual aid association as contemplated under Section 30 (C) 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. DACIHc However, it is subject to the corresponding internal revenue taxes imposed under the Tax Code of 1997 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 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 7 1/2% 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 a Profit and Loss Statement and Balance Sheet with the Annual Information Return under oath, stating its gross income and expenses incurred during the preceding 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. SEcITC It is requested that a copy of this letter of exemption be attached to the Annual Information Return which your corporation will file on or before the 15th day of the fourth month of each year. Under Section 235 of the Tax Code of 1997, any provision of existing general and special law to the contrary notwithstanding, the books of accounts and other pertinent records of tax-exempt organization or grantees of tax incentives shall be subject to examination by the BIR for purposes of ascertaining compliance with the conditions under which they have been granted tax exemptions or tax incentives, and their tax liabilities, if any. It should be understood that MET I, Inc. shall be constituted as a withholding agent for the government if it acts as an employer and any of its employee receives compensation income subject to withholding tax under Sec. 79 (A), Chapter XIII, Title II of the Tax of 1997, as amended, as implemented by Revenue Regulations No. 2-98, or if it makes income payments to individuals or corporations subject to the withholding tax provided for in Section 57 of the Tax Code of 1997, also as implemented by Revenue Regulations No. 2-98. AcIaST The receipts of the association dues, membership fees, power and water collections and other assessments/charges that will be collected from its members, which will be held in trust and which are to be used solely for administrative expenses in implementing its purpose/s and from which the aforesaid 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 are not subject to income tax and consequently to the expanded withholding tax. VAT Moreover, under Section 105 of the Tax Code of 1997, as amended, VAT is collected upon any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties and renders service. 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. AcHaTE Considering that MET I, Inc. will not sell, barter, exchange, lease any goods or property and will not render service for a fee but merely implements the administration of the required services to collect the association dues from the unit owners pursuant to its corporate purpose/s as "trustee" of the fund thereof, it is not subject to VAT on such activity. (BIR Ruling No. S-30-012-2006 dated April 04, 2006) WITHHOLDING TAX ON EXCESS UTILITY PAYMENTS Pursuant to Section 2.57.5 (B) (2) of Revenue Regulations No. 2-98 as amended by Revenue Regulations Nos. 3-2004 and 8-2005, is explicit in its provisions that the expanded withholding tax does not apply to income payments to persons enjoying exemption from payment of income taxes pursuant to the provisions of any law; general or special. MET I, Inc. is an exempt corporation organized for mutual aid association as contemplated under Section 30 (C) of the Tax Code of 1997, as amended. As such, it is exempt from payment of income tax on income received by it as such organization and consequently from the expanded withholding tax. DCIAST Further, since the excess utility payments pertain to expense related to MET I, Inc. registered activity, then the refund which will be received by it is not subject to the 32% regular corporate income tax because it is an exempt corporation under Section 30 (C) of the Tax Code of 1997, as amended. In sum, the MERALCO refund to MET I, Inc. arising from the Supreme Court case G.R. No. 141314 dated April 9, 2003 of the excess utility payments which were incurred and paid by it as an exempt organization under Section 30 (C) of the Tax Code of 1997, as amended, is exempt from the 32% regular corporate income tax, and consequently, from the 25% or 32% withholding tax imposed under Revenue Regulations No. 8-2005. (BIR Ruling No. DA-746-2006 dated December 29, 2006) 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. HCEcaT Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service