The Salcedo Towers Condominium Corporation

June 13, 2008 BIR RULING [DA-362-08] R.A. 4726; DA-304-04; VAT Ruling No. 026-97 The Salcedo Towers Condominium Corporation 10th Floor Salcedo Towers 169 H.V. dela Costa St. Salcedo Village, Makati City Attention: Ms. Margarita B. Flores Property Manager Gentlemen : This refers to your letter dated September 27, 2006 requesting for exemption from expanded withholding tax (EWT) and value added tax (VAT) on your collection of association dues and reimbursement of utility charges of your tenants/members. It appears that Salcedo Towers Condominium Corporation (STCC) with Tax Identification No. (TIN) 000-005-0340248 is a non-stock, non-profit corporation duly organized under Republic Act (R.A.) No. 4726 known as the Condominium Act with SEC Registration No. A199601692. Your BIR Certificate of Registration dated September 11, 1996 states that you are a non-VAT taxpayer and is not engaged in trade or business. You stated that your only source of fund is the association dues and uses it for your daily operations and payment of taxes and licenses, as well as to finance the provision of security for your tenants/members. Your usual operation includes maintenance of the building equipment (which includes but is not limited to: cooling tower/centralized air conditioning system, generator sets, transfer pumps, elevators, blowers, gauges, motors and others), and keeping up the cleanliness and orderliness of the common areas (which includes but is not limited to: parking areas, fire exits, lobbies, machine rooms, storage areas, ramps, stairways and others). Collection of charges for utilities is only a part of the total amount that the condominium corporation actually pays and treated only as reimbursement of the tenants/members share. In reply, please be informed that income earned by domestic corporations is subject to the thirty-five (35%) regular corporate income tax under Section 27 (A), as amended by Republic Act (R.A.) No. 9337. 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). The receipts of condominium dues 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 unit owners and from which STCC could not realize any gain or profit are not includible in STCC's gross income. Hence, the same is not subject to income tax and consequently to the EWT. (BIR Ruling No. DA-304-2004 dated June 2, 2004) Furthermore, in reimbursement-of-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 twelve percent (12%) VAT. (VAT Ruling No. 026-97 dated April 1, 1997) The mere 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 12% 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 EWT. (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 tenants/members and not being charges for sale of goods or services, shall not form part of STCC's gross income subject to the EWT and the 12% VAT. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service