Homeowner's associations taxability by: Rachelle Ann C. Baod
WITH THE ISSUANCE of Revenue Memorandum Circular No. (RMC)
9-2013, clarifying the taxability of association dues, membership fees and
other assessments/charges collected by homeowners’ associations, many taxpayers
were unfortunately perturbed on whether Republic Act No. (RA) 9904 (Magna Carta
for Homeowners and Homeowners’ Associations) was blatantly disregarded and
whether the previous related Bureau of Internal Revenue (BIR) rulings were
revoked.
It is an elementary rule in administrative law that
administrative rules and regulations are intended to carry out, not supplant or
modify, the law.
The law cannot be amended by a mere regulation or in this
case, a memorandum circular. In a Supreme Court (SC) decision, it was held that
a regulation that is inconsistent with the statute is a mere nullity and cannot
prevail.
Applying the above principle, an RMC, which is an
administrative issuance, cannot repeal RA 9904. On the other hand, BIR rulings,
also administrative issuances, may be revoked by an RMC.
Let us now take a closer look on the taxability or exemption
of homeowners’ associations, considering the validity of RA 9904 and RMC
9-2013.
Pursuant to RA 9904, where the Local Government Units (LGUs)
lack resources to provide for basic services, the associations shall endeavor
to tap the means to provide for the same.
In recognition of the associations’ efforts to assist the
LGUs in providing such basic services, association dues and income derived from
rentals of their facilities shall be tax-exempt provided that such income and
dues shall be used for the cleanliness, safety, security and other basic
services needed by the members, including the maintenance of the facilities of
their respective subdivisions or villages.
On the other hand, the BIR recently issued RMC 9-2013
emphasizing that association dues, membership fees, and other
assessments/charges collected by homeowners’ associations from its
homeowner-members and other entities are subject to value-added tax
(VAT)/percentage tax, income tax and consequently to expanded withholding
taxes.
Nevertheless, said RMC still entitles an association to
exemption provided certain conditions are satisfied.
It is important to take note of the significant points on
the BIR’s bases for the imposition of taxes, hence, departing from specific
provisions laid down under various BIR rulings while still seemingly upholding
the exemption set forth under RA 9904.
Based on the previous rulings issued by the BIR, collection
of association dues and other assessments/charges for condominium corporations
and homeowners association is exempted from income tax because "it is
merely held in trust to be used solely for administrative expenses in
implementing its purpose and from which both could not realize any gain or
profit."
However, the newly-issued RMC abandoned the previous
interpretations and clarified that the amounts paid as dues or fees by
homeowner-members of a homeowners’ association form part of the gross income of
the latter because such constitute income payments or compensation for
beneficial services it provides to its members and tenants, thus, subject to
income tax and consequently, expanded withholding taxes, accordingly.
IN THE COURSE OF TRADE OR BUSINESS
The new RMC also enunciated that the gross receipts of
homeowners’ associations including association dues, membership fees, and other
assessments/charges, being derived in the course of trade or business, are
subject to VAT or percentage taxes for non-VAT registered entities exempt under
Section 109 (1) (V) of the 1997 Tax Code, as amended.
Section 105 of the 1997 Tax Code, as amended, provides that
"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 e
ngaged 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.
Further, it pointed out that even a non-stock, non-profit organization
or government entity is liable to pay VAT on the sale of goods or services as
cited by the SC in Commissioner of Internal Revenue v. Court of Appeals and
Commonwealth Management and Services Corporation, (G.R. No. 125355, March 30,
2000). 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.
QUALIFYING FOR TAX EXEMPTION
Notwithstanding the clarifications set forth by the RMC on
imposition of taxes on homeowners’ associations, it concluded by reiterating
that association dues and income derived from rentals of the homeowners’
association’s properties may still be exempted from taxes provided the
following conditions are met:
The homeowners’ association must be a duly constituted
"association" as defined under Section 3(b) of RA 9904;
The local government unit having jurisdiction over the
homeowners’ association must issue a certification identifying the basic
services being rendered by the homeowners’ association and therein stating its
lack of resources to render such services notwithstanding its clear mandate
under applicable laws, rules and regulations.
Provided further, that such services must fall within the
purview of the "basic community services and facilities" which is
defined under Section 3(d) of RA No. 9904 as those referring to services and
facilities that redound to the benefit of all homeowners and from which, by
reason of practicality, no homeowner may be excluded such as, but not limited
to: security; street and vicinity lights; maintenance, repairs and cleaning of
streets; garbage collection and disposal; and other similar services and
facilities.; and
The homeowners’ association must present proof (i.e.
financial statements) that the income and dues are used for the cleanliness,
safety, security and other basic services needed by the members, including the
maintenance of the facilities of their respective subdivisions or villages.
As a rule, any claim for exemption from a tax statute is
strictly construed against the taxpayer. However, where the law is clear and
unambiguous, the law must be taken as it is, devoid of judicial addition or
subtraction.
Based on the foregoing, taxpayers claiming for exemption has
the burden of proving entitlement, otherwise, deemed taxable.
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Courtesy of : http://www.punongbayan-araullo.com
