Tax on condominium dues: It ain’t over ‘til it’s over

Taxpayers, specifically condominium corporations and unit owners rejoiced when the Court of Tax Appeals (CTA) came up with the recent decision in the case of Officemetro Philippines, Inc. (Formerly Regus Centres, Inc.) vs. Commissioner of Internal Revenue, CTA Case No. 8382 (Officemetro case).

After the promulgation of the Officemetro decision, the media came out with reports saying that condominium dues are not subject to tax. These reports were quite misleading, causing the public to believe that, indeed, condominium dues collected by the condominium corporations are not subject to income tax, expanded withholding tax (EWT) and value added tax (VAT) at all. There were also reports implying that the current Bureau of Internal of Revenue (BIR) commissioner erred in issuing Revenue Memorandum Circular (RMC) No. 65-12, which subjects condominium dues to the above-mentioned taxes.

On Oct. 31, 2012, the BIR, through RMC No. 65-12 clarified the taxability of association dues, membership fees, and other assessment/charges collected by condominium corporations.  Under this RMC, the BIR stressed that association dues, membership fees, and other assessments/charges collected by a condominium corporation constitute income payments or compensation for beneficial services, which it provides to its members and tenants, hence subject to income tax, EWT and VAT. For lack of legal basis, the BIR also made an express abandonment of its previous interpretation that condominium dues are funds merely held in trust by a condominium corporation.

However, in the Officemetro case issued on June 3, 2014, the CTA ruled that condominium dues are not subject to EWT. In the said case, Officemetro was assessed by the BIR for deficiency EWT, among others, for the taxable year 2005. The BIR asserted that Officemetro failed to pay the appropriate EWT on certain income payments that included rentals, professional fees, purchase of services and purchase of goods. On the other hand, Officemetro alleged that part of the reported rental in its audited financial statements represents payments for condominium dues which are not taxable income of the condominium corporation, and therefore should be excluded from the rental amount subject to EWT.

The CTA ruled in favor of Officemetro, relying on various BIR rulings from 2004 to 2009 which held that association/condominium dues, membership fees and other assessment/charges collected from the members which are merely held in trust and are to be used solely for administrative expenses in implementing their purposes, 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 consequently, to withholding tax.

However, a careful perusal of the decision in the Officemetro case will reveal that the CTA did not rule on the issue on VAT of condominium dues since Officemetro was not even assessed for VAT. The Court could not have ruled on the validity of RMC No. 65-12 considering that the deficiency assessment was for the year 2005 when RMC No. 65-12 was not yet in existence. This is contrary to the belief of many that the decision rendered RMC No. 65-12 invalid, making condominium dues not subject to tax at all. Further, the BIR rulings cited by the CTA as basis for the decision were from years 2004 to 2009, all prior to the issuance of RMC No. 65-12.

Amid the confusion of the public on the effect of the Officemetro case on RMC No. 65-12, the BIR posted a press release on the Department of Finance website last June 25, 2014 to clarify the issue regarding the taxability of condominium dues.  The BIR pointed out that the case is a decision of a CTA division, which is the subject of a pending Motion for Reconsideration. The BIR stressed that the CTA did not in any way rule on the issue of VAT on condominium dues. Neither did it rule on the validity of RMC No. 65-12. Therefore, according to the BIR, RMC No. 65-12 is the prevailing rule today and all concerned taxpayers are required to comply with its provisions.

The decision is not yet final considering the pending Motion for Reconsideration separately filed by Officemetro and the commissioner of Internal Revenue. Taxpayers concerned will just have to wait for the CTA’s resolution and if the case will eventually reach the Supreme Court, whether the highest court will adopt the ruling of the CTA Third Division that condominium dues are not included in the condominium corporation’s gross income, and therefore not subject to income tax and EWT.

In the meantime, as far as the BIR is concerned, the status quo remains and condominium dues are still subject to EWT and VAT per RMC No. 65-2012.

Beverly I. Mendoza is a supervisor from the tax group of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The view and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or RGM&Co. For comments or inquiries, please email [email protected] or [email protected]

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