Well settled is the rule that tax exemptions are construed strictissimi juris against the taxpayer and liberally in favor of the government. As a result, exemptions must be shown to exist clearly and categorically, and supported by clear legal provisions. In other words, one who seeks an exemption must justify it by words “too plain to be mistaken and categorical to be misinterpreted.” Thus, the burden of proving that one is tax-exempt rests on the taxpayer.
This rigid standard for claiming tax exemption seems to imply that any doubt respecting a taxpayer’s claim for exemption should always result in a denial.
However, this is not always the case. The principles above will apply only when the taxpayer is clearly subject to the tax being levied against him. The reason is obvious: it is illogical and impractical to determine who are exempted without first determining who are covered by the provision. Thus, unless a statute imposes a tax clearly, expressly and unambiguously, what applies is the equally well-settled rule that the imposition of tax cannot be presumed. In fact, in case of doubt tax laws must be construed strictly against the government and in favor of the taxpayer.
A law will not be construed as imposing tax unless it does so clearly and expressly, if the tax law does not impose a tax but the Bureau of Internal Revenue (BIR) issuance does, the latter is void. This legal principle is one of the reasons why the Supreme Court (SC) invalidated Revenue Memorandum Circular (RMC) No. 65-2012, in a case recently released on June 17, 2020.
RMC No. 65-2012 provides that association dues, membership fees, and other assessments/charges collected by a condominium corporation from its tenants form part of its gross income. Consequently, these are income payments or compensation for beneficial services it provides to its members and tenants. Thus, subject to income tax and value-added tax (VAT). Moreover, since a condominium corporation is subject to income tax, payments made to it are also subject to applicable withholding taxes.
According to the SC, RMC No. 65-2012 invalidly declares that the amounts paid as dues or fees by members and tenants of a condominium corporation form part of its gross income; thus, it is subject to income tax, VAT and withholding tax.
The SC reasoned that a condominium corporation is not designed to engage in activities that generate income or profit. Citing the case of Yamane vs. BA Lepanto Condominium Corporation, the Court elucidated that even though the corporation is empowered to levy assessments or dues from unit owners, these amounts collected are not intended for incurrence of profit by the corporation or its members, but to shoulder the multitude of necessary expenses that arises from the maintenance of the condominium project.
Moreover, while a condominium corporation enjoys the powers of ownership, it is prohibited by law from transacting properties for the purpose of gainful profit.
The High Court went on to discuss the nature of condominium corporations under Republic Act (RA) 4726 (The Condominium Act), explaining that the collection of association dues, membership fees, and other necessary assessments/charges is purely for the benefit of the condominium owners. It is a necessary incident to the purpose to effectively oversee, maintain, or even improve the common areas of the condominium as well as its governance.
Evidently, the nature of condominium corporations and the purpose for which the fees and dues are collected are the primary factors considered by the Court in concluding that in collecting the said fees and dues, condominiums are not engaging in trade or business.
Furthermore, the High Court categorically declared RMC No. 65-2012 as void since it expanded, if not altered the list of taxable items in the law. It noted that the definition of gross income under the Tax Code, as amended by the Tax Reform for Acceleration and Inclusion (TRAIN Law), does not include association dues, membership fees, and other assessments/charges collected by condominium corporations as sources of gross income.
Hence, RMC 65-2012 is void, pursuant to well-established rule that in case of conflict between the law and the implementing rule, the law shall prevail.
Another issue tackled in the case was whether assessment dues, membership fees and other assessments/charges are subject to income tax, VAT and withholding tax.
For income tax, the SC ruled that association dues, membership fees, and other assessments/charges are not subject to income tax because they do not constitute profit or gain. 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 relation to this, it should be noted that withholding tax may be imposed only when there is income, active or passive. Having established that the assessment dues, membership fees, and other assessments/charges are not considered income, but are collected to shoulder the multitude of necessary expenses that arise from the maintenance of the Condominium Project, then it is not subject to withholding tax.
For VAT, the SC clarified that association dues, membership fees and other assessments/charges are not subject to VAT because they are not mentioned in Sections 106, 107, and 108 of the Tax Code.
However, this reasoning appears to be inconsistent with the earlier pronouncement of the SC in CIR vs. SM Prime Holdings, Inc., where it held that the enumeration of services subject to VAT under Section 108 is not exhaustive. The words, “including,” “similar services,” and “shall likewise include,” Indicate that the enumeration is by way of example only. This apparent contradiction might confuse taxpayers as to which services are subject to VAT. The author submits that the ruling in CIR vs. SM Prime Holdings, Inc., is controlling, considering that one of the issues raised therein is whether the enumeration in Section 108 is exhaustive in coverage.
Going back to the VAT portion of the case, the SC added, that 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. Therefore, it cannot be said to be engaged in trade or business, thus, the collection of the fees and dues is not a result of the regular conduct or pursuit of a commercial or economic activity, or any transactions incidental thereto.
Likewise, the condominium corporation is not rendering services to the unit owners for a fee, remuneration or consideration, since the fees and dues it collected form part of a pool from which it must draw funds in order to bear the costs of maintenance, repair, improvement, and other administrative expenses.
It should be emphasized, however, that the TRAIN Law now expressly exempted from VAT the said fees and dues collected by condominium corporations.
The impact of this recent development on condominium corporations cannot be discounted. There is a likelihood that condominiums that paid taxes under the void RMC may file a claim for tax refund for the illegally collected tax. However, is this remedy still available to them?
In Accenture, Inc., vs. CIR, it was ruled that when the Supreme Court decides a case, it does not pass a new law, but merely interprets a pre-existing one. It is elementary that such interpretation constitutes part of the law from the date it was originally passed, since the Court’s construction merely established the contemporaneous legislative intent that the interpreted law carried into effect.
Thus, the Court’s interpretation of the Tax Code’s provision exempting from income tax, VAT and withholding taxes the fees and dues collected by a condominium corporation is considered part of the law from the time of its enactment. Consequently, following High Court’s pronouncement in CIR vs. San Miguel Corporation, that the declaration of a tax regulation as invalid and no effect rendered the collection of taxes thereunder baseless, and thus illegal, the invalidation of RMC No. 65-2012 rendered as illegal the collection of taxes thereunder.
This gives the concerned condominiums the right to request the return of such illegally collected taxes under Section 204 and 229 of the Tax Code, as amended. However, not all taxes paid may be refunded, as claims for refund of erroneously or illegally collected taxes should be filed within two (2) years from the date of its payment.
To reiterate, the burden rests upon the taxpayer to prove entitlement to his claim for refund. For refunds are akin to tax exemptions and are strictly applied against the claiming party.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Peter Irish R. de Leon is an associate of the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.
As published in BusinessWorld, dated 23 June 2020