BIR Ruling [DA-406-04]

July 26, 2004 BIR RULING [DA-406-04] 32, 105 DA-178-2003; DA-362-2000 Filinvest Land, Inc. 173 P. Gomez St. San Juan, Metro Manila Attention: Atty. Andrew James Gerard Dulay Ruiz Tax Counsel Gentlemen : This refers to your letter dated June 30, 2004 requesting for confirmation of your opinions that: 1) the transfer of titles to the common areas of the Prominence II Condominium Project at Brentville International by Filinvest Land, Inc. (FLI) to the Prominence II Condominium Association, Inc. shall not be subject to withholding tax and documentary stamp tax; 2) the official receipts which would subsequently be issued by Prominence II Condominium Association, Inc. in the course of collecting association dues, membership fees, utilities dues and other miscellaneous collections, in conjunction with its function as a condominium corporation shall not be subject to income tax, withholding tax and the value-added tax. The facts as you represented are as follows: FLI, is a corporation duly organized and existing under the laws of the Republic of the Philippines, and is engaged in the development and sale of real estate. FLI is the lawful owner and developer of parcels of land measuring forty one thousand two hundred seventy two square meters (41,272 sq.m.) and one thousand four hundred seventy nine square meters (1,479 sq.m.) covered by Transfer Certificates of Title (TCTs) Nos. 479608 and No. 479609, respectively, known as the Prominence II Condominium Project (PCP II) at Brentville International located at Barangay Mamplasan, Bian, Laguna. On the other hand, the Prominence II Condominium Association, Inc. (PCAI II for brevity) is a non-stock, non-profit corporation organized under the provisions of Republic Act (RA) No. 4726, as amended, otherwise known as the Condominium Act, with its principal office located at Barangay Mamplasan, Bian, Laguna. On December 18, 2001, FLI executed a Master Deed of Restrictions for the PCP II at Brentville International, under which the lands covered by TCT Nos. 479608 and No. 479609 and the building and other improvements thereon were constituted into a condominium project in accordance with RA No. 4726, as amended. In compliance with said Master Deed of Restrictions and the provisions of RA No. 4726, as amended, FLI, through a Deed of Conveyance executed on June 29, 2004, ceded, transferred and conveyed, without any consideration, the parcels of land covered by TCT Nos. 479608 and No. 479609, as well as the common areas thereof, to the PCAI II. PCAI II will hold title to the common areas in PCP II and to the lot on which the project is located. PCAI II will likewise manage, operate and control, supervise and oversee the said Project, levy and collect association dues or assessments from all unit owners proportionate to the area owned and in accordance with the sharing scheme expressed in the Master Deed with Declaration of Restrictions. In conjunction with its functions as a condominium corporation, PCAI II will issue receipts in the course of collection of, and relative to, the following expenses and dues: 1. Association dues which will cover reimbursable expenses on common areas such as contracted services (e.g., janitorial, security services, pest control, garbage fees), salaries and wages of administration office personnel, taxes and licenses, national or local government imposed or required fees, repairs and miscellaneous expenses; 2. Membership fees, move-in fees (if applicable); 3. Reimbursement of actual insurance premiums for the building; 4. Other receipts and collections for water, electricity, and such other utilities as may be applicable; 5. Other receipts and collections, such as miscellaneous collections from lost ID, car pass and other items. In reply, please be informed as follows: 1. The conveyance of the lands and common areas in the condominium project was made without consideration and is not in connection with a sale made to PCAI II. Inasmuch that the purpose of the conveyance to PCAI II is for the management of the project for the common benefit of the unit-owners and no taxable income has been generated, therefore, no creditable withholding tax prescribed under Section 2.57(B) of Revenue Regulations No. 2-98, implementing Section 57(B), in relation to Section 27 of the Tax Code of 1997 is payable and collectible. Neither such conveyance is subject to the documentary stamp tax imposed under Section 196 of the same Tax Code. Section 185 of the Revised Documentary Stamp Tax Regulations (Regulations No. 26)provides that "conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable." However, the notarial acknowledgement to said Deed of Conveyance is subject to the documentary stamp tax P15.00 pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. DA-178-2003 dated June 5, 2003) 2. The PCAI II's receipts of the above-mentioned expenses and dues 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 which the aforesaid association will 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 is not subject to income tax and consequently to the expanded withholding tax. Pursuant to Section 105 of the Tax Code of 1997, 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. Considering that PCAI II will not sell, barter, exchange, nor lease any good or property and neither will it render service for a fee but merely implements the administration of the required services to collect the aforestated expenses and dues from the unit owners pursuant to its corporate purpose/s as "trustee" of the fund thereof, then it is not subject to VAT on such activity. ( BIR Ruling No. DA-362-2000 dated October 23, 2000 ) 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 null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service