Taxwise Or Otherwise

Since the issuance of Revenue Memorandum Circular (RMC) 65-2012 eight years ago, the additional tax burden on condominium corporations and unit owners has often been the subject of much controversy. This is in no small part due to the shift in the position of the Bureau of Internal Revenue (BIR). Prior to 2012, the BIR had consistently confirmed in several rulings that dues, membership fees and other fees collected by condominium corporations are exempt from tax. The RMC, however, declared that the dues and fees paid by the members and tenants form part of the gross income of the condominium corporation as they constitute compensation for services rendered, hence, subject to income tax, value-added tax (VAT), and withholding tax.

RMC 65-2012 is akin to RMC 35-2012, which imposes income tax and VAT on membership fees, dues, and other charges collected by recreational clubs. The only difference lies in the subject matter — the former applies to a condominium corporation while the latter covers recreational clubs.

Under the previous 1977 Tax Code, specifically Section 26(H), clubs organized and operated exclusively for pleasure, recreation, and other non-profitable purposes were exempt from income tax provided that no part of the net income inures to the benefit of any private stockholder or member. However, Republic Act 8424 or the 1997 Tax Code, subsequently omitted the provision granting this tax exemption to recreational clubs. The BIR interpreted this to mean that all income of recreational clubs from whatever source is subject to income tax starting 1998. Nonetheless, in June 2019, the Supreme Court declared RMC 35-2012 as invalid for erroneously foisting a sweeping interpretation that membership fees and assessment dues are sources of income from which recreational clubs could accrue income tax liability.

Exactly one year later, the Supreme Court issued a similar decision, ruling in favor of condominium corporations and invalidating RMC 65-2012. According to the High Court, association dues, membership fees, and other assessments/charges collected by condominium corporations are not subject to income tax, VAT or withholding tax.

Under Republic Act No. 4726 or the Condominium Act, a condominium corporation can collect association dues, membership fees, and other assessment charges to effectively perform its function of maintaining or improving the common areas of the condominium, as well as its governance.  In its decision, the Supreme Court affirmed that a condominium corporation is not engaged in a trade or business even though it is empowered to levy assessment dues from the unit owners. The amounts collected are not intended for profit but solely to shoulder the multitude of necessary expenses that arise from the maintenance of the condominium project.

As one of its bases, the Supreme Court relied on its 2019 ruling in the case of ANPC v. BIR covering recreational clubs. In that case, the court ruled that the fees paid by the members represent funds held in trust by the recreational clubs to defray for the cost of maintenance, preservation, and upkeep of its general operations and facilities. The amounts cannot be classified as the income of recreational clubs from whatever source that are subject to income tax. Instead, they only form part of the capital from which no income tax may be collected or imposed. In drawing the distinction, capital refers to wealth as opposed to income being the service of wealth. Similarly, the fees and dues collected by condominium corporations are only capital/funds held in trust, therefore not income subject to tax and subsequently to withholding tax.

Further, the mere collection of fees is not subject to 12% VAT since they do not arise from the sale, barter, or exchange of goods or property nor generated by the performance of services.  When a condominium corporation manages, maintains, and preserves the common areas in the building, it does so only for the benefit of the condominium owners. The collection of dues and fees is not a result of the regular conduct or pursuit of commercial or economic activities, or any transactions incidental to it. Neither can it be said that a condominium corporation is rendering services to the unit owners for a fee, consideration, or remuneration.

Also, the Tax Reform for Acceleration and Inclusion (TRAIN) Law specifically identified association dues, membership fees, and other assessments/charges collected by homeowners’ associations and condominium corporations as exempt transactions. Thus, RMC 65-2012 runs contrary to the TRAIN Law.

According to the Supreme Court, RMC 65-2012 transgresses jurisprudence and the Condominium Act because it invalidly declares that the dues and other fees paid by its members and tenants form part of the gross income of the condominium corporation. In doing so, the BIR expanded, if not altered, the list of taxable items under the Tax Code, and is therefore void.

Well-settled is the rule that in case of conflict between statutory law and administrative rules or regulations, the law should always prevail. While the BIR is empowered to interpret tax laws, it cannot, in the exercise of such power, issue administrative rulings or circulars inconsistent with the law.

Given this pronouncement, what happens then to the taxes erroneously paid to the BIR? Legally, a claim for refund can be filed with the BIR. However, affected parties cannot indefinitely recover all the erroneous payments made over the last eight years while the RMC was presumed valid. This is because the law limits the recovery to two years from the date of the erroneous tax payment.

Nevertheless, from a practical perspective, even if the option to refund is available, there may be nothing substantial that needs recovery in terms of the last two years. For one, the TRAIN Law removed the VAT starting 2018. As for the income tax, since membership dues and fees are mostly utilized for the operating expenses of the condominium, such collections are normally fully used up at the end of the year and are not likely to have led to substantial income tax payments. Consideration should also be given to the procedures and cost that will be incurred in pursuing a refund.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.


Charilyn R. Caliwag is a senior consultant at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

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