SC to BIR: Condo homeowner fees are not Vat-able

THE Supreme Court (SC) has declared invalid an eight-year-old Bureau of Internal Revenue imposing a 12-percent value-added tax (VAT) and 32-percent income tax on association dues, membership fees and other charges collected by condominium operators from its members and tenants. The high court said the activities of these sectors, such as the upkeep of homeowners’ common areas, are not for profit, and therefore should not be taxed.

In a 33-page decision released on Wednesday, the SC’S First Division through Associate Justice Amy Lazaro-javier affirmed the resolution issued by the Regional Trial Court of Makati City Branch 14 and its order dated December 18, 2013, granting the plea of First E-bank Tower Condominium Corp. to void BIR Revenue Memorandum Circular No. 65-2012 issued on October 31, 2012.

In resolving the issue, the SC noted that the validity of the BIR circular which has been pending for six years now, from the time it was filed before the trial court then with the Court of Appeals and now with the SC, “is imbued with public interest.”

It acknowledged that RMC No. 65-2012 has far-reaching consequences among condominium corporations which have proliferated throughout the country.

“For numerous Filipino families, professionals, and students have, for quite sometime now, opted for condominium living as their new way of life. The matter of whether indeed the contributions of unit owners solely intended for maintenance and upkeep of the common areas of the condominium building are taxable is imbued with public interest,” the SC said.

“Suffice it to state that taxes, being the lifeblood of the government, occupy a high place in the hierarchy of State priorities, hence, all questions pertaining to their validity must be promptly addressed with the least procedural obstruction,” it added.

In nullifying RMC No. 65-2012, the SC pointed out that a condominium corporation is not designed to engage in activities to generate income or profit that would warrant the imposition of VAT and income tax.

The SC explained that condominium corporations are sanctioned by Republic Act No. 4726 SC to BIR: Condo (The Condominium Act).

The SC pointed out that under that law, a condominium is an interest in real property consisting of a separate interest in a unit in a residential, industrial or commercial building and an undivided interest in common, directly or indirectly, in the land on which it is located and in other common areas of the building.

To enable the orderly administration over these common areas which the unit owners jointly own, RA 4726 permits the creation of a condominium corporation for the purpose of holding title to the common areas.

The law states that unit owners automatically become members or shareholders of the condominium corporation.

Furthermore, the High Tribunal said under Section 10 of the said law, the corporate purposes of a condominium corporation are limited to holding the common areas, either in ownership or any other interest in real property recognized by law; management of the project; and to such other purposes necessary, incidental, or convenient to the accomplishment of these purposes.

It added that under Section 22, of RA 4726, the condominium corporation, as the management body, “may only act for the benefit of the condominium owners in disposing tangible and intangible personal property by sale or otherwise in proportion to the condominium owners’ respective interest in the common areas.

Thus, the SC said it cannot give weight to BIR’S argument that amounts paid as dues or fees by members and tenants of a condominium corporation form part of the gross income of the latter and are thus subject to income tax, value-added tax and withholding tax.

The BIR had argued that a condominium corporation furnishes its members and tenants with benefits, advantages and privileges in return for such payments.

Consequently, the tax-collecting body said, these payments constitute taxable income or compensation for beneficial services it provides to its members and tenants.

However, the SC said Section 32 of Republic Act 8424 or the Tax Reform Act of 1997 does not include association dues, membership fees and other assessment charges collected by condominium corporations as sources of gross income.

Even the Tax Reform for Acceleration and Inclusion (TRAIN) Law which amended RA 8424, the SC said, replicates the provisions in Section 32 of RA 8424.

“Clearly, RMC No. 65-2012 expanded, if not altered, the list of taxable items in the law. RMC No. 65-2012, therefore, is void. Besides, where the basic law and a rule or regulation are in conflict, the basic law prevails,” the SC declared.

“Similarly, therefore, association dues, membership fees and other assessments/charges are not subject to income tax because they do not constitute profit or gain. To repeat, they are collected purely for the benefit of the condominium owners and are the incidental consequence of a condominium corporation’s responsibility to effectively oversee, maintain, or even improve the common areas of the condominium as well as its governance,” it added.

Likewise, the SC said association dues, membership fees and other assessments/charges are not subject to VAT because these fees do not come from transactions involving the sale, barter, or exchange of goods or property.

“Both under RA 8424 (Sections 106, 107,and 108) and the TRAIN Law, there, too, is no mention of association dues, membership fees and other assessments/ charges collected by condominium corporations being subject to VAT. And rightly so. For when a condominium corporation manages, maintains and preserves the common areas in the building, it does so only for the benefit of the condominium owners. It cannot be said to be engaged in trade or business…,” the SC explained.

The High Tribunal also reminded the BIR that while it is empowered to interpret tax laws and decide tax cases, it cannot issue circulars inconsistent with the law to be implemented.

Concurring in the ruling were Chief Justice Diosdado Peralta and Associate Justice Benjamin Caguioa, Jose Reyes Jr. and Mario Lopez.