BIR Ruling [DA-426-04]

August 10, 2004 BIR RULING [DA-426-04] Sec. 105 DA-008-00 Joaquin Cunanan & Co . 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Mr . George J . Lavadia Principal Tax Services Gentlemen : This refers to your letter dated May 31, 2004, requesting in behalf of your client CGB Condominium Owners Association, Inc., (CGB) for confirmation of your opinion that the association dues and other charges it collects from its members, which are merely held in trust and used solely for administrative expenses, do not form part of the Association's gross income, hence not subject to the corporate income tax and the 10% value-added tax (VAT). It is represented that CGB is a non-stock, non-profit corporation organized pursuant to Republic Act No. 4726 and registered with the Securities and Exchange Commission (SEC) on July 6, 1977 to, among others, hold title to and manage the common areas of the Cacho-Gonzalez Building Condominium Project; to adopt such measures as may be necessary for the protection of the unit owners/members and their property in the Project; to provide for the maintenance, repair, sanitation and cleanliness of the common areas in the Project, as well as for the beautification and betterment thereof; to provide and contract for public utilities and other services to the common areas of the Project; and such other purposes as are necessary, incidental or convenient to the accomplishment of its purposes; that as provided for in the Association's by-laws, the owners of each unit, i.e., the association members are liable for the common expenses related to the administration, maintenance, operation, repair, restoration or replacement of the common areas and other portions of the Project, as well as for taxes and other expenses on such areas and other portions of the Project; that the association also levies upon each member annual assessment for capital expenditures on the common areas of the Project, the cost of extraordinary repair, reconstruction or restoration necessitated by damage, depreciation, obsolescence, expropriation or condemnation; that the assessment are in proportion to each member's appurtenant proprietary interest or participation in the Association; that the Association's receipts, as enumerated above, which are used by the Association to cover the common expenses related to the project (e.g., janitorial, security services, pest control, garbage fees, salaries and wages of the Association employees, repairs and maintenance expenses) are merely held in trust by the Association on behalf of its members until such time that such funds are disbursed for the member's common benefit; and that at no time will it realize or generate any gain or profit from such receipts since all of it will be used solely for the expenses of the Association in implementing the purposes for which it was incorporated. In reply, please be informed that the CGB's receipts of the Association dues, and other assessments/charges collected from the members, which are merely held in trust and which are to be used solely for administrative expenses in implementing its purpose/s i.e., promote general welfare, property and service of the Association, specifically, protect and safeguard the welfare of the owners, lessees and occupants of the property, provide utilities and amenities for public use and the maintenance of services and solid management and environmental control, and which CGB could not realize any gain or profit as a result of its receipt thereof are not includible in said association'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) AScHCD Pursuant to Section 105 of the 1997 Tax Code, value-added tax (VAT) is collected upon any person, who in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services. 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 the Association does not sell, barter, exchange, nor lease any good or property and neither does it 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" for the fund thereof, it is not subject to the value-added tax (VAT) on such activity. (VAT Ruling No. 026-97 dated April 1, 1997) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed 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