SC rules membership fees from recreation clubs not subject to income tax, VAT

Published August 15, 2019, 1:45 PM

by AJ Siytangco

By Rey Panaligan 

The Supreme Court (SC) has ruled that membership fees, assessment dues, and other fees collected by clubs which are organized and operated exclusively for pleasure, recreation, and other non-profit purposes are not subject to income and value-added taxes (VAT).

Supreme Court of the Philippines (MANILA BULLETIN)
Supreme Court of the Philippines (MANILA BULLETIN)

The court directed the Bureau of Internal Revenue (BIR) to re-align its August 3, 2012 Memorandum Circular No. 35-2012, in accordance with its decision that granted the petition of the Association of Non-Profit Clubs, Inc. (ANPC).

The circular states that “clubs which are organized and operated exclusively for pleasure, recreation, and other non-profit purposes are subject to income tax under the National Internal Revenue Code (NIRC) of 1997, as amended.”

It also states that “the gross receipts of recreational clubs including, but not limited to membership fees, assessment dues, rental income, and service fees are subject to VAT.”

The ANPC held a dialogue with the BIR in October, 2012, and the association was asked to submit its position paper on the issue.

When the BIR did not act on its request, ANPC filed on Sept. 17, 2014, a petition for declaratory relief with the Makati City regional trial court (RTC) to declare the RMC No. 35-2012 “invalid, unjust, oppressive, confiscatory, and in violation of the due process clause of the Constitution.”

The Office of the Solicitor General (OSG) opposed ANPC’s petition citing, among other things, the association’s failure to exhaust administrative remedies.

On July 1, 2016, the RTC dismissed ANPC’s petition as it upheld the validity and constitutionality of the BIR’s circular.

The group raised the issue before the Supreme Court.

The decision written by Associate Justice Estela M. Perlas Bernabe stated that “while the 1997 NIRC omitted recreational clubs from the list of exempt organizations under the 1977 Tax Code…, RMC No. 35-2012 erroneously foisted a sweeping interpretation that membership fees and assessment dues are sources of income of recreational clubs from which income tax liability may accrue….”

The decision enumerated rulings in previous cases which made distinctions between “capital” and “income.”

It said “capital” has been delineated as a “fund” or “wealth” as opposed to “income” being “the flow of services rendered by “capital” or the “service of wealth.”

It pointed out that ANPC was correct in arguing that “membership fees, assessment dues, and other fees of similar nature only constitute contributions to and/or replenishment of the funds for the maintenance and operations of the facilities offered by recreational clubs to their exclusive members.”

Membership fees, assessment dues, and other similar fees “represent funds ‘held in trust’ by these clubs to defray their operation and general costs and hence, only constitute infusion of capital,” the court noted.

It however said the membership, assessment and other fees collected from members are different from “the fees received by recreational clubs coming from their income-generating facilities, such as bars, restaurants, and food concessionaires, or from income-generating activities, like the renting out of sports equipment, services, and other accommodations.