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Taxation 2005
Taxation 2005
Makati City
Attention: Mr. Rafael Sison
Roxas Triangle Tower Condominium Corporation
c/o Ayala Property Management Corporation
5th Level Glorietta IV, Ayala Center
Makati City
Attention: Mr. Ariston Estrada, Jr.
Avignon Tower Condominium Corporation
c/o Ayala Property Management Corporation
5th Level Glorietta IV, Ayala Center
Makati City
Attention: Ms. Josephine Turalba
Gentlemen :
This refers to your letter dated November 13, 2002 requesting for a
clarification on the validity of Regional Revenue Memorandum Circular No. 2-2002
(RRMC-2-2002 for brevity) issued on June 19, 2002 by Regional Director Antonio I.
Ortega of Revenue Region 8, Makati City.
The facts, as you represent, are as follows:
RRMC-2-2002 covers the taxability of condominium corporations, particularly
their liability for payment of income tax and value-added tax (VAT for brevity) on
the sale of service.
Section 2 of RRMC-2-2002 provides that a condominium corporation is not a
civic league for the promotion of social welfare, hence not exempt from corporate
income tax. For this purpose, it cites various Bureau of Internal Revenue (BIR for
brevity) Rulings which essentially state that the association or corporation formed by
unit owners to provide for the arrangement, maintenance and care of the common
areas of the condominium project benefit only the members thereof, who are the
owners of the condominium units. They do not benefit the community as a whole, and
therefore, cannot be considered civic leagues or organizations operated exclusively
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"The phrase '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 engaged therein is a nonstock, nonprofit organization (irrespective of
the disposition of its net income and whether it sells exclusively to members
or their guests), or government entity."
b.
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c.
d.
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Evidently, the Regional Director imposed upon himself this exclusive and
original jurisdiction when he issued RRMC-2-2002, to wit:
"Section 1. Scope. Some of our revenue officers have verbally
consulted the undersigned whether or not 'condominium corporation' may be
treated exempt from corporate income tax under Section 30, NIRC of 1997
and, also, whether its sale of service is subject to the value added tax under
Section 108 of the said Code."
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Sec. 10
Revenue Regional Director. Under rules and
regulations, policies and standards formulated by the Commissioner, with the
approval of the Secretary of Finance, the Revenue Regional Director shall,
within the region and district offices under his jurisdiction, among others:
(a) Implement laws, policies, plans, programs, rules and regulations
of the department or agencies in the regional area;
(b) Administer and enforce internal revenue laws, and rules and
regulations, including the assessment and collection of all internal revenue
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(g) Exercise control and supervision over the officers and employees
within the region; and
(h) Perform such other functions as may be provided by law and as
may be delegated by the Commissioner."(Emphasis supplied.)
(d)
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91 thereof;
(h)
of 1997;
Exemption from donor's tax under Section 101 of the Tax Code
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Thus, the RRMC, being issued outside the scope of the legal authority of the
Regional Director, is ultra vires, and thus, null and void. The Supreme Court held:
". . . Ultra vires acts or acts which are clearly beyond the scope of
one's authority are null and void and cannot be given any effect. The doctrine
of estoppel cannot operate to give effect to an act which is otherwise null and
void or ultra vires." (Acebedo Optical Company, Inc. vs. CA, et. al, G.R. No.
100152, March 31, 2000).
As to Issue No. 2:
Although this particular issue is considered moot by reason of the
pronouncement made above, this Office deems it fit to discuss the same to clarify the
prevailing ruling on this matter.
RRMC 2-2002 made mention of several rulings (Unnumbered BIR Ruling
dated November 22, 1978, BIR Ruling Nos. 227-86 dated December 18, 1986,
042-89 dated March 22, 1989 and 193-93 dated May 5, 1993) as basis for not
exempting condominium corporations from corporate income tax in view of the fact
that such corporations are not considered civic league for the promotion of social
welfare nor a social welfare organization.
To repeat, the Regional Director has no power to overrule, review or modify
current rulings of the BIR. In issuing the RRMC contravening existing rulings of the
BIR, the Regional Director acted arbitrarily.
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The current administrative position of the BIR on the issue of whether or not
condominium corporations are subject to income tax and VAT remains as follows:
1)
2)
3)
"SECTION 2.
. . . Title to the common areas, including the land,
or the appurtenant interests in such areas, may be held by a corporation
specially formed for the purpose (hereinafter known as the "condominium
corporation") in which the holders of separate interest shall automatically be
members or shareholders, to the exclusion of others, in proportion to the
appurtenant interest of their respective units in the common areas.
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"SECTION 10.
Whenever the common areas in a condominium
project are held by a condominium corporation, such corporation shall
constitute the management body of the project. The corporate purposes of
such a corporation shall be limited to the holding of the common areas, either
in ownership or any other interest in real property recognized by law, to the
management of the project, and to such other purposes as may be necessary,
incidental or convenient to the accomplishment of said purposes. . . ."
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In fact, Section 36 of the Income Tax Regulations (RR No. 2 for brevity)
defines "income" as:
"Section 36. Meaning of net income. The tax imposed by law is
upon income. In the computation of the tax, various classes of income must be
considered:
(a) Income, in the broad sense, meaning all wealth which flows into
the taxpayer other than a mere return of capital: It includes the forms of
income specifically described as gains and profits, including gains derived
from the sale or other disposition of capital assets. Income cannot be
determined merely by reckoning cash receipts, for the statute recognizes as
income determining factor other items, among which are inventories, accounts
receivable, property exhaustion, and accounts payable for expenses incurred.
(b) Gross income, meaning income (in the broad sense) less income
which is by statutory provision or otherwise exempt from the tax imposed by
law.
caEIDA
(c)
In BIR Ruling No. 029-98 dated March 19, 1998, this Office stated that the
following must exist for income to be taxable:
1.
2.
3.
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The above-mentioned conditions are not fulfilled by the mere act of collecting
dues, fees, and assessments, as these amounts are collected solely to fund
administrative, utilities, and maintenance expenses of the common areas of a building,
a condominium, or a housing project.
Furthermore, in BIR Ruling DA-008-01-05-00 dated January 5, 2000, this
Office, was confronted with the issue of whether or not Bonifacio Global City Estate
Association (BGCEA for brevity) is liable for income tax on the association dues or
other assessments collected from its unit owners.
We ruled that BGCEA's receipt of association dues and other
assessments/charges collected, from the members, which are merely held in trust and
which are to be used solely for administrative expenses in implementing the purposes
of BGCEA, and which it could not realize any gain or profit as a result of its receipt
thereof, are not includible in said corporation's gross income, thus not subject to
income tax and consequently, to the expanded withholding tax.
In BIR Ruling DA-126-02-24-00 dated February 24, 2000, it was the tax
exemption of Wack Wack Condominium Corporation, another nonstock, nonprofit
organization, which was presented to the BIR for resolution. The BIR denied its
request for tax exemption for lack of legal basis since a condominium corporation or
homeowners association is not those enumerated as exempt from payment of income
tax under Section 30 of the Tax Code. This Office, nonetheless, opined that:
"In this connection, you are further advised that the collections being
paid by your tenants for the maintenance of common areas of the
condominium building is not subject to income tax since no income was
generated. However, the sale of janitorial services and other related services
shall be subject to value-added tax but the act of 'collection' by the association
from the tenants of their respective shares in the payment of said services is
not itself subject to VAT."
Furthermore, in BIR Ruling No. 303-88 dated July 8, 1988, this Office
confirmed that common area charges are not subject to the expanded withholding tax
on rental fees since they cannot properly be considered as payment for the continued
use or possession of the leased property but are used to pay for electricity, air
conditioning, security guards, janitorial services and maintenance of hallways.
Membership dues, fees, and assessments are not subject to VAT
the same being considered not payments for the sale of services
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Section 108 of the National Internal Revenue Code of 1997 defines the
phrase 'sale of .services' as the 'performance of all kinds of services for others
for a fee, remuneration or consideration.' It includes 'the supply of technical
advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial
undertaking or project."
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2.
This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation, it will be ascertained that the facts are different, then
this ruling shall be considered void.
Very truly yours,
(SGD.) JOSE MARIO C. BUAG
OIC Commissioner of Internal Revenue
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