By Rey Panaligan
The Supreme Court (SC) has invalidated a Bureau of Internal Revenue (BIR) circular that imposes a 12 per cent value-added tax (VAT) and 32 per cent income tax on association dues, membership fees and other charges collected by condominium corporations from its members and tenants.
In a decision written by Associate Justice Amy C. Lazaro Javier, the SC invalidated BIR Revenue Memorandum Circular No. 65-2012 “for ordering that ‘gross receipts of condominium corporations including association dues, membership fees, and other assessments/charges are subject to VAT, income tax and income payments made to it are subject to applicable withholding taxes.’”
“A law will not be construed as imposing a tax unless it does so clearly and expressly. In case of doubt, tax laws must be construed strictly against the government and in favor of the taxpayer,” the SC said.
It also pointed out that “taxes, as burdens that must be endured by the taxpayer, should not be presumed to go beyond what the law expressly and clearly declares.”
The decision was made public by the SC last June 17. It reversed the decision issued by the Court of Appeals in 2014 as it reinstated the ruling handed down by the Makati City regional trial court (RTC) in 2013.
The RTC granted the petition of First E-Bank Tower Condominium Corporation to void RMC 65-2012 which the BIR issued on Oct. 31, 2012. The CA reversed the RTC ruling.
In invalidating RMC 65-2012, the SC said 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.
It pointed out that the setting up of condominium corporations is sanctioned by Republic Act No. 4726, the Condominium Act.
Under RA 4726, the SC said 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.
It said that for orderly administration of common areas in a condominium building, RA 4726 allows the creation of a condominium corporation for the purpose of holding titles to the common areas, and unit owners automatically become members of shareholders of the corporation.
It pointed out that 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 also stressed that 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 the argument of the BIR that amounts paid as dues or fees by members and tenants of a condominium corporation form part of the gross income of the latter, thus, subject to income tax, value-added tax, and withholding tax.
It also said that 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 replicates the provisions in Section 32 of RA 8424, it said. The TRAIN law amended 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 stressed.
“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 said.
At the same time, it said that 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 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…,” it added.
Finally, the SC reminded the BIR that while the tax agency is empowered to interpret tax laws and decide tax cases, it cannot issue circulars inconsistent with the law to be implemented.