BIR Ruling [DA-304-04]

June 2, 2004 BIR RULING [DA-304-04] Sec. 32 DA 196-01; 362-00; VAT Ruling 048-97; 129-92 The Enterprise Center Condominium Corporation Level 5 Tower 2, The Enterprise Center 6766 Ayala Avenue cor. Paseo de Roxas Makati City Attention: Federico O. Noel, Jr. Corporate Legal Counsel Gentlemen : This refers to your letter dated March 29, 2004 requesting confirmation of your opinion that: 1) Condominium dues collected from condominium unit owners and; 2) utility charges/billings reimbursed by the unit owners for the utility bills accruing to the individual units at cost and without profit do not form part of TECCC's taxable income. CTEaDc It is represented that TECCC was formed as a non-stock, non-profit corporation pursuant to Republic Act (RA) No. 4726, otherwise known as the Condominium Act. Under its Articles of Incorporation, the corporate purpose of TECCC shall be limited to owning or holding title to the common areas and limited common areas of the Enterprise Center and the management thereof. Any and all monies and assets of the TECCC shall be devoted exclusively to the furtherance of these purposes, and no dividend of any kind or distribution of income shall be declared or made. Pursuant to Article 8 of the By-laws, TECCC may assess against each member such condominium dues as shall be necessary to meet the operating costs and expenses. Such expenses include the following: 1. Regular assessments for operating expenses such as: a. All taxes and assessments due on the individual unit or units; b. Expenses for maintenance and repair of any unit if such maintenance is necessary to protect the condominium or to safeguard its value and attractiveness; c. Cost of maintenance or repairs of the condominium whether located inside or outside the units, unless the expense is necessitated or caused by the act or negligence of a unit owner, tenant or occupant, in which case the expenses shall be chargeable to the owner or occupant of the unit; d. The cost of insurance policies insuring the condominium against loss by fire, earthquake and other casualty risks; e. Fees and/or salaries of managerial, legal, accounting, engineering and other professionals or technical personnel or entities employed or retained to assist in the management of the condominium; and f. All expenses considered as common expenses (e.g., electricity, after-office aircon, water, helipad and exhaust supply). 2. Regular assessments for capital expenditures which shall be used for extraordinary repairs, reconstruction or restoration necessitated by damage, depreciation, obsolescence and expropriation or condemnation. 3. Special and other assessments which shall be for the cost of repairs of common or limited common areas, tax assessments on real properties, insurance on the common and limited common areas. It is represented further that TECCC merely holds in trust the association dues collected from the unit owners which are used for administrative expenses, utilities and maintenance and repairs of the common areas for the benefit of said unit owners; that TECCC does not realize any gain or profit as a result of its receipt of association dues. Additionally, TECCC also collects reimbursements from the unit owners for utility expenses (e.g., water, electricity and other public utilities) paid by TECCC in behalf of said unit owners; that for instance, in the case of water and electricity, TECCC maintains a mother meter which indicates the total utility consumption to be paid by TECCC for a certain period; that using the individual meters maintained at each unit as basis, the utility charges paid are allocated to each unit based on actual consumption and later on reimbursed at cost. Finally, it is represented that in effect, TECCC only advances the payment of the utility bills and then have the same reimbursed by the unit owners at cost and without any profit. In the light of the foregoing representations, you now seek a ruling on the following: 1. Condominium dues assessed and collected by TECCC from condominium owners, which are used for the expenses to operate and maintain the building and which no profit is realized as a result of receipt thereof, are not, to be subject to the corporate income tax and expanded withholding tax. 2. The receipts of reimbursements from unit owners of utility charges (e.g., water, electricity and other public utilities) are not subject to expanded withholding tax and of the 10% VAT as TECCC does not sell, barter, exchange, nor lease any good or property nor does it renders any service to the unit owners and as the receipts are reimbursements only of costs paid by TECCC in behalf of the unit owners and no profit is made therefrom. In reply, please be informed as follows: 1. Generally, income earned by domestic corporations is subject to the 32% regular corporate income tax. Nevertheless, collections being paid by unit owners for the maintenance of common areas of a condominium building is not subject to income tax since no income is generated therefrom. ( BIR Ruling No. DA-126-00 dated February 24, 2000 and BIR Ruling DA 196-01 dated October 17, 2001 ). aICHEc The receipts of condominium dues from the unit owners which are merely hold 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 from which TECCC could not realize any gain or profit are not ineludible in TECCC's gross income. Hence, the same is not subject to income tax and consequently to the expanded withholding tax. ( BIR Ruling No. 103-94 dated May 16, 1994; DA-470-98 dated November 3, 1998; BIR Ruling DA-008-00 dated January 5, 2000; and BIR Ruling DA-362-00 dated October 23, 2000 ) 2. In reimbursement-at-cost transactions, expenses which are incurred by the advancing party for the benefit and for the account of the party accommodated, can be considered reimbursable expenses not forming part of gross receipts of the advancing party subject to tax. Since the party seeking reimbursement does not sell, barter, ,exchange, nor lease any food or property and neither does it render any service to the party accommodated, the reimbursement transactions are not subject to the 10% VAT ( VAT Ruling No. 026-97 dated April 1, 1997 ). The more collection of purely reimbursable costs billed, for instance, in the name of a client but collected through a broker or agent shall not be subject to the 10% VAT provided that such fact of reimbursement is clearly shown in the billing and/or official receipt ( VAT Ruling No. 048-97 dated July 11, 1997 ) and being reimbursement of expenses without any mark-up or profit element ( BIR Ruling No. 001-90 dated January 4, 1990 ) and not charges for services, should not be considered as part of gross receipt for purposes of the expanded withholding tax. ( BIR Ruling No. 129-92 dated April 20, 1992 ) In view of all the foregoing, this Office is of the considered opinion that receipts of mere reimbursement of cost with no mark-up or profit element of utility charges paid in behalf and for the account of the unit owners and not being charges for sale of goods or services, shall not form part of TECCC's gross income subject to the EWT and the 10% VAT. 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, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group