Ramon F. Garcia & Company

September 9, 2009 BIR RULING [DA-(VAT-080) 518-09] R.A. 4726; DA-18-2005, DA-304-2004, DA-196-2001, DA-126-2000, DA-129-92, DA-(VAT-019) 336-08, DA-304-04 Ramon F. Garcia & Company 30/F Burgundy Corporate Tower, 252 Gen. Gil Puyat Avenue, Makati City Attention: Ms. Nhorie L. Paguio Gentlemen : This refers to your letter dated March 13, 2006 which was later refiled on July 22, 2009 requesting in behalf of your client, Mile Long Association, Inc., for a confirmation of the following: EaCDAT 1. That association dues paid for by its clients can be charged the 12% VAT provided that the said members agree to the said imposition; 2. That although association dues and other related charges will be covered by VAT, these charges are still considered non-taxable income for income tax purposes; and 3. That the rental income generated from the lease of the common spaces of the building and the parking area is subject to VAT. It is represented that Mile Long Association, Inc., (Mile Long) is a non-stock, non-profit association duly organized and existing under the laws of the Republic of the Philippines, organized on September 20, 1985; that it is engaged primarily to manage, administer, maintain and preserve the common areas in Mile Long Building situated in Amorsolo Street, Makati City, and to promote the health, safety and welfare of all unit owners in the building; that Mile Long is a VAT registered entity reporting VAT and Non-VAT income; that as an association of condominium unit owners, Mile Long reimburses the administrative and building maintenance expenses to their members in the form of association dues and other related fees; and that it also generates rental income from the common space of the building and parking area. 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). DcSTaC 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 Mile Long Association, Inc. could not realize any gain or profit are not includible in Mile Long Association, Inc.'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. 001-09 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 Mile Long Association, Inc.'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 disclosed that the facts are different, this ruling shall be considered null and void. caHCSD Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service