A recent BIR memo subjecting to VAT transactions made by a condominium corporation will significantly increase the cost of owning a unit. Here is one article gives some reasons why the memo should be changed.
From BusinessWorld Philippines
December 03, 2012
Condo living is not a business
THE BASIC aspiration of a common Filipino is to own a piece of land, with a humble house he can call his own. Nowadays, even the lack of direct soil ownership has become acceptable. For some, even preferred.
Owning a condominium unit and living in the city do have their advantages. Proximity to the workplace means more quality time with family, instead of wasting precious time in traffic. And better security translates to peace of mind and more productivity while at work.
One may say, not so peaceful of late though, as ownership of a condominium unit appears to be indirectly attacked through the imposition of value-added tax, and income/withholding tax on condominium dues.
In Revenue Memorandum Circular 65-2012, the Bureau of Internal Revenue (BIR) rationalizes that condominium corporations are subject to income tax as the association dues and other assessment/charges are not merely held in trust but are compensation for “beneficial services it provides to its members and tenants.” The BIR also said they are subject to VAT on their gross receipts because all persons in the course of trade or business is subject to VAT, even if they are non-stock or non-profit entities.
Truth be told, you will not find condominium corporations in the enumeration of tax-exempt corporations in Section 30 of the Tax Code. And VAT being imposed on gross revenue or receipts does not care whether an entity earns income or not.
The other truth of the matter is condominium corporations organized under the Condominium Act do not need the tax exemption under Section 30 of the Tax Code to be not subject to tax.
A condominium is an interest in property consisting of a separate interest in a unit and an undivided interest in the common areas, including land. Such common areas are held by the unit owners through the condominium corporation. The Condominium Act also sanctioned the assessment of dues for the upkeep of the common areas.
In Civil Code language, a condominium is both an ownership and a co-ownership. Merely owning or co-owning is not a business per se. The incidental efforts to preserve what one owns is therefore also not a business activity. This is the reason why assessments/dues paid to condominium corporations organized under the Condominium Act are not income payments.
VAT should also not apply on these payments by owners because while VAT is indeed based on gross receipts, it is imposed on those who receive such payments in the ordinary course of business. The term ordinary course of business has been consistently defined in jurisprudence as a regular commercial activity with profit as motive. Co-owning, and spending for the maintenance of the co-owned property in an efficient manner, is not a business or commercial activity.
Fortunately, this school of thought that owning and maintaining a condo unit is not a business is not without legal backing.
In the case of Makati City vs. BA Lepanto Condominium Corp. (GR 154993, Oct. 25, 2005), the city tried to impose local business tax on the condominium corporation. When the city treasurer was pressed for the legal basis of the assessment, she insisted that the collection of dues from the unit owners was for the expenses to maintain the common areas to get “full appreciative living values” for the individual occupants. If you struggle with what that means, the treasurer was actually referring to being able to command better prices if the condominium unit is sold in the future. And because a condo unit owner may make money when the unit is eventually sold (if ever), then the condominium corporation should be considered engaged in business.
The Supreme Court (SC), ruling in favor of the condominium corporation, elucidated that in order for corporations to be subjected to business taxes, their activities must constitute business. In this case, the SC stated that the activities of the condominium corporation are limited by law. In this case, the Charter and by-laws of the corporation hew to this limitation, and none of its stated purposes are geared towards maintaining a livelihood or the obtention of profit.
The SC went on to state that condominium corporations are empowered to “acquire, own, hold, enjoy, lease, operate and maintain, and convey sell, sell, transfer or otherwise dispose of real or personal properties” as all corporations. Without this power, they will be “deprived of the capacity to engage in most meaningful legal relations.”
As to the reason given by the City treasurer (i.e., “full appreciative living values”), the SC found such “baffling.” Following this rationale, the SC said that every Makati City car owner may be considered engaged in business since the repairs and improvements on the car can appreciate the value of the car upon resale.
The SC in the same case cautioned that it is not unthinkable for unit owners to band together and engage in activities for profit under the shelter of the condominium corporation. But this fact must be established to make the condominium corporation subject to tax.
In the same vein, it can be echoed that no condominium corporation can be used as an invalid cover to hide taxable activities. And the BIR can certainly go after them in these cases with all their might.
But in the meantime, it is earnestly hoped that RMC 65-2012 will be reconsidered. After all, condominium unit owners should be allowed to peaceably dwell in their residences and not be subjected to costs of living higher than necessary, or to taxes when not necessary.
(The article is the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines. The author is vice-chair of the Tax Committee of the Management Association of the Philippines. He is the vice-chair and tax managing partner of Isla Lipana & Co., the Philippine member firm of the PricewaterhouseCoopers global network. Feedback at firstname.lastname@example.org. For previous articles, please visit map.org.ph)