BIR Ruling [DA-334-03]

October 7, 2003 BIR RULING [DA-334-03] United BF Homeowners' Associations, Inc. (UBFHAI) UBFHAI Clubhouse, No. 37 Pilar Banzon Street Paraaque City Attention: Atty. Veneranda Acaylar-Cruz Gentlemen : This refers to your letters dated March 28, 2003 and March 3, 2003 requesting for reconsideration of BIR Ruling No. DA165-02 dated September 17, 2002, where this Office ruled that ". . . Accordingly, since UBFHAI has generated revenues from its business operations during the years 1996 to 2000 in the aggregate amount of P71,745,397.21 . . . shall be subject to the regular corporate income tax at the rate of 35% on its net taxable income for the years 1996 and 1997. However, the marginal top rate is reduced to 34% effective January 1, 1998, 33% effective 1999 and 32% effective January 2000 and thereafter. Moreover, its income derived from the sale of goods or services in the course of a business pursuit is subject to value-added tax pursuant to VAT Ruling No. 119-90 dated May 14, 1990. THaDAE "xxx xxx xxx." In your aforesaid letters, you stated that BF Homes Subdivision, Phases 1-6, actually comprises contiguous areas in Paraaque, Las Pias and Muntinlupa spread over 765 ha. of real estate between two major and busy arteries: the Alabang-Zapote Road in the South and Sucat in the North; that the total area is 765 ha. peopled by over 10,000 homeowners translating to over 65,000 residents; that there are 8 entry and exit points, a security nightmare; that BF Homes is a private subdivision officially classified as R-1; that the roads and open spaces have not been turned over to any of the LGUs concerned and are maintained by UBFHAI (1992); that technically, the subdivision could deny passage from Alabang to Sucat as such, but its location and the presence of schools in the environs dictate it should otherwise allow ingress so the system of stickers was devised for homeowners and non-residents for security control; that on the premise that UBFHAI maintains the roads, the other users for convenience must share in its upkeep; that this finds support in the fact that LGUs cannot repair the aforesaid roads because it cannot spend public funds for private purposes; that the unbridled expansion of BF Homes in the early seventies resulted in an open city with rampant housebreaking, carnapping and other crimes and it became physically impossible for a single homeowners' association to handle; that in the 1980s, small associations began to crop up providing for their internal security, garbage collection and other basic activities but yet the subdivision and the main roads were still open; that in 1984, there were over 14 local associations, as they came to be known, among others, Confederation of BF Homes Association, Inc. (CBFHAI) and the original BF Paraaque Homeowners Association, Inc. (BFPHAI); that BF Homes, Inc. suffered financial setbacks and later went under receivership. In 1988, with all the attendant chaos brought about by this unique situation, the developer BFHI initiated and concluded a tripartite Memorandum of Agreement (MOA) and amended MOA with the original association and the CBFHAI for the setting up of an Integrated Security Program (ISP) and a unified homeowners' association, UBFHAI; that under the MOA, UBFHAI would hereafter administer the ISP, which included manning of the 8 entry and exit points, security in the perimeters and main avenues and assume all responsibility for other basic services; that UBFHAI was incorporated on May 18, 1989 and it assumed administration of basic services, first, with BFHI subsidy and fully on its own beginning 1993; that the delivery of basic services in BF Homes thus evolved a unique administrative set-up found only in the subdivision: local associations or enclaves provide for their internal security, garbage collection, maintenance and upkeep while UBFHAI provides for external security, security in the main avenues, enforcement of internal zoning guidelines, emergency medical and fire prevention services, maintenance of open spaces, roads and infrastructures and other basic services; that local associations fund their services from association dues while UBFHAI does not collect association dues but funds its services from sale of stickers to non-residents (upon a homeowners/local association's endorsement), fees and other charges it is allowed to impose under its charter; that UBFHAI is registered as a Non-VAT taxpayer as of September 28, 1992; that the homeowners' associations should not be classified with condominium corporations/associations because even if they are subject of the same law (P.D. 957), subdivision homeowners' associations are on a much larger scale; that UBFHAI represents 10,000 homeowners and some 65,000 residents; that the income generated should not be lumped up as all taxable income because these revenues are from fees and charges that UBFHAI is allowed to collect by virtue of its charter; that such income, if at all, is derived not from services rendered or business operations but rather as impositions or payors' contributions to the continued upkeep of the roads and infrastructure; and that UBFHAI is never engaged in any business but rather for the delivery of basic services as mandated by law. cDTSHE In reply thereto, please be informed that after a careful restudy of the above-cited ruling together with the law and regulations applicable therewith, your request for reconsideration cannot be granted for lack of legal basis. Accordingly, income derived by UBFHAI from the sale of stickers to non-homeowners are subject to the regular corporate income tax and value-added tax respectively imposed under Sections 27 (A), 106 and 108 of the Tax Code of 1997. You seem to be puzzled why UBFHAI can be tax-exempt and at the same time not tax-exempt. Quite simply, under the Tax Code, UBFHAI is a tax-exempt organization because it is not engaged in business for profit. However, the moment it engages in business for profit, it loses to that extent its tax-exempt status. Sale of stickers generates income which is subject to tax as ruled in BIR Ruling No. DA165-02. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group