BIR aims at non-stock non-profit entities

Not content with taxing the recreational and social clubs, the Bureau of Internal Revenue (BIR) set its eyes, this time, on the condominium associations.

Similar to the recreational clubs, it slapped them with income tax and VAT on their receipt of association dues, membership fees and assessment charges received.

Earlier, the BIR imposed the same taxes on membership fees and dues received by social and recreational clubs.

Revenue Memorandum Circular (RMC) 65-2012, which was posted at the BIR website last November 14, reversed the previous position of past Commissioners exempting condominium associations from the payment of income tax and VAT.

The exemption was premised on the theory that receipt of association dues and assessment charges is not receipt of income, there being no sale of goods or rendition of service.

Receipt of income

RMC 65-2012 believes otherwise. The RMC says that the receipt of association dues and fees is actually receipt of income, these being payments received in exchange for the benefits, advantages and privileges that the condominium corporation does to its members and tenants.

So which is which? Are association dues and assessment charges in the nature of income?

A condominium association is composed of people, the owners and tenants of condominium units, who grouped themselves together to undertake the common management of their properties.

They set aside a sum of money (called association dues) and put it in a common fund from which the expenses for the maintenance of their properties are taken.

It is like setting aside or spending money for the repair and maintenance of one’s property, the only difference being, in the case of condominium, this is done as a group rather than singly.

No taxable income

But in both cases, it does not involve a sale of goods or performance of a service, thus, there is no taxable income to speak of.

The role of the condominium association, insofar as its receipt of association dues and assessment fees is concerned, is only to hold the fund in trust for the members and disposing it only upon the instruction and in accordance with the wishes of the members who are the real owners of the fund.

The association holds legal title to the fund but the beneficial ownership rest with the members—an arrangement that fits that of a trustor-trustee relationship.

But RMC 65-2012 looks at it differently. According to the RMC, the members pay the dues in exchange for the beneficial services and privileges they receive from the association.

These divergent views could be an interesting topic for academic discussion and ripe for judicial determination since this involves not only condominium associations but all others similarly situated, not to mention thousands of homeowners’ associations.

The imposition of taxes will definitely translate to increase in association dues to cover for the 30 percent income tax (on net income) and 12 percent VAT.

Judicial determination

Talking about judicial determination, there is another RMC simultaneously released by the BIR (RMC 67-2012) clarifying the taxes on proprietary non-stock, non-profit hospitals and educational institutions relying on the recent decision of the Supreme Court in the case of Commissioner of Internal Revenue vs. St. Luke’s Medical Center Inc.

While RMC equated the tax treatment of proprietary non-profit hospitals with that of educational institutions, let us not forget that non-stock non-profit educational institutions are given Constitutional exemption from all taxes on its assets and revenues used actually, directly and exclusively for educational purposes, hence, placing them in a higher pedestal of exemption compared to hospitals.

Such exemption given by no less than the Constitution is sufficient to bar the implementation of any contrary provision in the Tax Code.

Anyway, the St. Luke’s case pertains, as we all know, to a hospital. A proprietary non-stock non-profit hospital is not totally exempt from tax as a charitable institution unless it is organized and operated exclusively for charitable purposes.

‘Exclusively’

The word “exclusively” has been emphasized such that, in case the hospital accepts fees from paying patients, then it is not considered “exclusively” operated for charity and therefore its income is taxable.

The tax to be imposed on the income is a preferential rate of 10 percent, provided not more than 50 percent of its income is from unrelated hospital activities, otherwise, it is the regular 30 percent income tax.

Taking refuge in the St. Luke’s case, the BIR took the opportunity to clarify the taxation of and requirements for exemption of the other non-stock non-profit corporations organized for charitable purposes and civic leagues organized for the promotion of social welfare.

To be considered charitable within the context of tax exemption, the benefit provided must be for an indefinite number of persons, providing free goods and services to the public that would have otherwise fell on the shoulders of the government.

Any profit derived must not only be plowed back but must be devoted altogether for charitable purposes.

Tax-exempt

For these types of organizations to be tax-exempt, it must also comply with the following:

— It is non-stock non-profit;

— It is operated exclusively for charitable purposes;

— It is organized exclusively for charitable purposes; and

— No part of its income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person.

The phrases “organized exclusively” and “operated exclusively” have been emphasized by the BIR to signify that receipt of income from any activity conducted for profit will subject them to the regular taxes.

In RMC 7-2012, the BIR already clarified that a sale of property by a non-stock, non-profit corporation is subject to capital gains tax and documentary stamp taxes.

Earlier, in RMC 12-2012, certain kinds of cooperatives were disqualified from the tax exemption given under the new Cooperatives Code. The BIR stretched further to request the Cooperatives Development Authority (CDA) to deny the registration of certain cooperatives (such as those in labor-contracting, professional, construction, mining, health) which led the CDA to recall the delegated authority given to its regional offices to register these types of cooperatives.

So, who will be next?

(The author is chairperson of the tax committee of the Management Association of the Philippines and managing partner of Du-Baladad and Associates, or BDB Law. Feedback at [email protected]. For previous articles, visit map.org.ph.)