Withholding tax on condominium dues

THE MODIFICATION of time-honored principles and interpretations of legal provisions will certainly cause issues that cannot be fully resolved in a single case alone. It will take more than one case before the ambiguities and confusions caused by these changes are fully addressed.

The real estate industry has in recent years been considered one of the bright spots of the Philippine economy. And with the alleged sustained growth indicated by different economic indicators, as well as the consequent advancements in technology that contributed to the fast-paced lifestyle of many Filipinos, there is a corresponding increase in the demand for the construction and development of additional buildings meant to be used as office spaces, commercial establishments and residential units.

Hoping to cash in on this development, the Bureau of Internal Revenue (BIR) previously issued Revenue Memorandum Circular No. (RMC) 065-12, which supposedly clarified the taxability of association dues, membership fees, and other charges collected by condominium corporations. Under RMC 065-12, the association dues, membership fees and other charges paid by unit owners and/or beneficial users have been subjected to income tax, withholding tax and 12% value-added tax (VAT).

Accordingly, the Commissioner of Internal Revenue (CIR) stressed that “[t]he amounts paid in as dues or fees by members and tenants of a condominium corporation form part of the gross income of the latter subject to income tax. This is because a condominium corporation furnishes its members and tenants with benefits, advantages, and privileges in return for such payments. For tax purposes, the association dues, membership fees, and other assessments/charges collected by a condominium corporation constitute income payments or compensation for beneficial services it provides to its members and tenants. The previous interpretation that the assessment dues are funds which are merely held in trust by a condominium corporation lacks legal basis and is hereby abandoned.”

“Moreover, since a condominium corporation is subject to income tax, income payments made to it are subject to applicable withholding taxes under existing regulations.”

Lastly, the BIR emphasized that the “[a]ssociation dues, membership fees, and other assessments/charges collected by a condominium corporation are subject to VAT since they constitute income payment or compensation for the beneficial services it provides to its members and tenants.”

The taxpayers affected raised a howl, especially that the BIR has previously been consistent in issuing rulings that affirm and confirm that the association dues and membership fees paid by unit owners and beneficial users are not subject to the aforementioned taxes.

Here now comes the case of Officemetro Philippines, Inc., (formerly Regus Centres, Inc.) vs. Commissioner of Internal Revenue, CTA Case No. 8382, June 3, 2014.

In the aforesaid case, the taxpayer was assessed for deficiency expanded withholding tax (EWT), among others for taxable year 2005. The BIR alleged in the tax assessment that Officemetro/Regus failed to pay the expanded withholding tax on certain income payments, such as rentals, professional fees, purchase of services and purchase of goods. After the reinvestigation made by the BIR, only the reduced assessments on the withholding tax on rentals and purchase of services remained.

In its petition with the Court of Tax Appeals (CTA), Officemetro alleged that a portion of the rentals that were declared in its audited financial statements were actually payments of condominium dues that do not form part of the taxable income of the condominium corporation, and is therefore not subject to withholding tax.

The Third Division of the CTA, through the Honorable Justice Esperanza R. Fabon-Victorino, agreed. According to the Court, the condominium dues billed to Officemetro are not subject to expanded withholding tax. Citing a list of BIR rulings that were issued prior to RMC 065-12, the Court held that “association/condominium dues, membership fees and other assessment/charges collected from the members, which are merely held in trust and which are to be used solely for administrative expenses in implementing their purpose (s), viz., to protect and safeguard the welfare of the owners, lessees and occupants; provide utilities and amenities for their members, and from which the corporation could not realize any gain or profit as a result of their receipt thereof, must not be included in said corporation’s gross income. This means that the same are not subject to income tax and withholding tax.”

For that reason, that portion of the condominium dues and membership fees that were duly substantiated by the company with invoices, official receipts, and statements of accounts were excluded by the CTA from the rental subject to EWT.

Surprisingly, RMC 065-12 was never discussed in the decision. Neither was it mentioned whether RMC 065-12 was an erroneous interpretation of the tax code by the CIR. Nor was it explained why RMC 065-12 should not be retroactively applicable to the Officemetro case, considering that RMC 065-12 provided an express proviso declaring invalid for lack of legal basis the previous interpretations declaring the assessment dues and membership fees to be merely held in trust by condominium corporations.

Incidentally, the Regional Trial Court Branch 146 in Makati City previously declared RMC 065-12 to be invalid in the special civil action case filed by First e-Bank Tower Condominium Corp. against the BIR. The RTC held in the said case that RMC 065-12 did not merely interpret or clarify but changed altogether the long-standing rule of the BIR. As a result, RMC 065-12 was issued in violation of the constitutional mandate of due process of law.

It is clearly plausible that the Officemetro case has now created a buzz and has in fact rippled through the tax community in so short a time. Nevertheless, it is emphasized that there are still issues regarding RMC 065-12 that need to be addressed, aside from, of course, whether the Supreme Court, as final arbiter, or even the CTA En Banc, once the BIR files an appeal/ reconsideration, acquiesces to the findings of the CTA Third Division.

The author is a manager with the tax advisory and compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.

source:  Businessworld