BIR Ruling No. 215-13

June 14, 2013 BIR RULING NO. 215-13 CIR vs. CA and Commonwealth Management and Services Corporation, G.R. No. 125355; RMC 65-2012 Reyes Francisco Tecson & Associates Law Office Unit 1710 Cityland 10 Tower 1 H.V. dela Costa St. Salcedo Village, Makati Attention: Pastor M. Reyes Jr. Senior Partner Gentlemen : This refers to your letter dated February 15, 2011 requesting on behalf of your client, The Waterfront Towers Condominium Corporation ("Waterfront Towers") , exemption from withholding tax and value-added tax (VAT) on its income consisting of condominium dues, rental payments and other assessments. It is represented that Waterfront Towers , with Taxpayer's Identification No. 229-669-422-000, is a non-stock, non-profit corporation duly organized under the laws of the Philippines; that it is registered with the Securities and Exchange Commission (SEC) under Registration No. 0107590 and that the primary purposes for which it was incorporated are the following: 1) To own or hold title to the common areas of the condominium project known as "Waterfront Towers Condominium Project" which has been constituted in accordance with the provisions of the Condominium Act by a Master Deed and Declaration of Restrictions executed by Marbella Club (Manila), Inc.; and 2) To manage the said condominium project pursuant to and in accordance with Republic Act No. 4726, the Master Deed and the Declaration of Restrictions. IaECcH In support of its request, Waterfront Towers has completely submitted the following documents: 1) Letter application for tax exemption; 2) Certified true copy of the Certificate of Registration with the SEC; 3) Certified true copy of the Articles of Incorporation; 4) Certified true copy of the By-Laws; 5) Certified true copy of the Annual Information Return and Financial Statements for the last three (3) years of operation; 6) Articles of Incorporation, manner of activities as well as sources and disposition of income; and 7) BIR Certificate of Registration. Income Tax In reply, please be informed that the association dues, membership fees, and other assessments/charges collected by a condominium corporation from its members, tenants, and other entities form part of the gross income of the latter subject to income tax. This is because a condominium corporation furnishes its members and tenants with benefits, advantages, and privileges in return for such payments. For tax purposes, the association dues, membership fees, and other assessments/charges collected by a condominium corporation constitute income payments or compensation for beneficial services it provides to its members and tenants. The previous interpretation that the assessment dues are funds which are merely held in trust by a condominium corporation lacks legal basis and is hereby abandoned. HaIESC Moreover, since a condominium corporation is subject to income tax, income payments made to it are subject to applicable withholding taxes under existing regulations. (Revenue Memorandum Circular 65-2012 dated October 31, 2012) Value-Added Tax (VAT) Likewise, the association dues, membership fees, and other assessments/charges collected by a condominium corporation are subject to VAT since they constitute income payment or compensation for the beneficial services it provides to its members and tenants. Section 105 of the National Internal Revenue Code of 1997, as amended, provides: "Section 105. Persons Liable. Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of the same Code. xxx xxx xxx 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." ECAaTS The above provision is clear that even a non-stock, non-profit organization or government entity is liable to pay VAT on its sale of goods or services. This conclusion was affirmed by the Supreme Court in the case of Commissioner of Internal Revenue vs. Court of Appeals and Commonwealth Management and Services Corporation, G.R. No. 125355 , March 30, 2000. In the said case, the Supreme Court held: "(E)ven a non-stock, non-profit, organization or government entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on transactions, imposed at every stage of the distribution process on the sale, barter, exchange of goods or property, and on the performance of services, even in the absence of profit attributable thereto. The term "in the course of trade or business" requires the regular conduct or pursuit of a commercial or an economic activity, regardless of whether or not the entity is profit-oriented. The definition of the term "in the course of trade or business" incorporated in the present law applies to all transactions even to those made prior to its enactment. Executive Order No. 273 stated that any person who, in the course of trade or business, sells, barters or exchanges goods and services, was already liable to pay VAT. The present law merely stresses that even a non-stock, nonprofit organization or government entity is liable to pay VAT for the sale of goods and services. Section 108 of the National Internal Revenue Code of 1997[10] defines the phrase "sale of services" as the "performance of all kinds of services for others for a fee, remuneration or consideration." It includes "the supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking or project." ICTcDA On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No. 010-98[12] emphasizing that a domestic corporation that provided technical, research, management and technical assistance to its affiliated companies and received payments on a reimbursement-of-cost basis, without any intention of realizing profit, was subject to VAT on services rendered. In fact, even if such corporation was organized without any intention of realizing profit, any income or profit generated by the entity in the conduct of its activities was subject to income tax. Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of determining liability for VAT on services rendered. As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT." In view thereof, the gross receipts of condominium corporations including association dues, membership fees, and other assessments/charges are subject to VAT, income tax and consequently to applicable withholding taxes under existing regulations. (Revenue Memorandum Circular 65-2012 dated October 31, 2012) Accordingly, your request for exemption from withholding tax and value-added tax (VAT) on the corporation's income consisting of condominium dues, rental payments and other assessment is hereby denied for lack of factual and legal basis. Please be guided accordingly. SacDIE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue