Homeowner's associations taxability

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.

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.

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.

Courtesy of : http://www.punongbayan-araullo.com