SC voids taxes on condo tenants

The Supreme Court has sustained a lower court ruling rejecting a circular by the Bureau of Internal Revenue imposing a 12-percent value-added tax and 32-percent income tax on association dues, membership fees, and other charges collected by condominium operators from its members and tenants.

In a decision released Wednesday, the high court’s First Division upheld the resolution issued by the Makati City Regional Trial Court Branch 14, and its order dated Dec. 18, 2013, that granted the plea of First E-Bank Tower Condominium Corp. to void BIR Revenue Memorandum Circular 65-2012 issued on Oct. 31, 2012.

“Clearly, RMC No. 65-2012 expanded, if not altered, the list of taxable items in the law. RMC No. 65-2012, therefore, is void. Besides, where the basic law and a rule or regulation are in conflict, the basic law prevails,” the high court ruled.

“Similarly, therefore, association dues, membership fees, and other assessments/charges are not subject to income tax because they do not constitute profit or gain. To repeat, they are collected purely for the benefit of the condominium owners and are the incidental consequence of a condominium corporation’s responsibility to effectively oversee, maintain or even improve the common areas of the condominium as well as its governance.”

In ruling against the BIR, the high court considered that the validity of the BIR circular, which had been pending for six years, “is imbued with public interest.”

According to the tribunal, RMC No. 65-2012 has far-reaching consequences among condominium corporations that have proliferated throughout the country.

“For numerous Filipino families, professionals and students have, for quite some time now, opted for condominium living as their new way of life. The matter of whether indeed the contributions of unit owners solely intended for maintenance and upkeep of the common areas of the condominium building are taxable is imbued with public interest,” the high court said.

“Suffice it to state that taxes, being the lifeblood of the government, occupy a high place in the hierarchy of State priorities, hence, all questions pertaining to their validity must be promptly addressed with the least procedural obstruction.’

In nullifying RMC No. 65-2012, the high court emphasized that a condominium corporation is not designed to engage in activities to generate income or profit that would warrant the imposition of VAT and income tax.

In fact, the high court said, condominium corporations are sanctioned by Republic Act 4726 or the Condominium Act.

Under that law, the high court said, a condominium has an interest in real property consisting of a separate interest in a unit in a residential, industrial or commercial building and an undivided interest in common, directly or indirectly, in the land on which it is located and in other common areas of the building.

To enable the orderly administration over these common areas which the unit owners jointly own, RA 4726 permits the creation of a condominium corporation for the purpose of holding title to the common areas.

The law further says that unit owners automatically become members or shareholders of the condominium corporation.

Besides, the high court said that under Section 10 of that law, the corporate purposes of a condominium corporation are limited to holding the common areas, either in ownership or any other interest in real property recognized by law; management of the project; and to such other purposes necessary, incidental or convenient to the accomplishment of these purposes.

It added that under Section 22 of R.A. 4726, the condominium corporation, as the management body, “may only act for the benefit of the condominium owners in disposing tangible and intangible personal property by sale or otherwise in proportion to the condominium owners’ respective interest in the common areas.

Because of this, the high court disagreed with the argument of the BIR that the amounts paid as dues or fees by members and tenants of a condominium corporation form part of the gross income of the latter, thus subject to income tax, value-added tax, and withholding tax.