In an opinion issued on January 15, 2020 in G.R. No. 218924, Bureau of Internal Revenue v. First E-Bank Tower Condominium Corporation, penned by Associate Justice Lazaro-Javier, the Supreme Court (SC) held that association dues, membership fees, and other assessment/charges collected by condominium corporations are not subject to income tax, value-added tax (VAT), and withholding tax.
First E-Bank Tower Corporation (First E-Bank), a condominium corporation, filed a petition for declaratory relief with the National Capital Regional Trial Court, Branch 146, Makati City, with a prayer to have the Bureau of Internal Revenue’s (BIR) Revenue Memorandum Circular (RMC) No. 65-2012 declared invalid. The RMC characterized association dues, membership fees, and other assessment/charges collected by condominium corporations as income and as payment for the services rendered by the condominium corporation to its tenants/owners, and declared the same subject to income tax, value-added tax, and withholding tax.
First E-Bank argued that the regulation was “oppressive and confiscatory” as it unduly burdened condominium owners with taxes on fees used for the maintenance and preservation of the building and its premises. The BIR moved to dismiss because the remedy invoked was improper as the RMC was already operative at the time that the petition was filed.
The trial court granted First E-Bank’s petition and declared RMC No. 65-2012 void, ruling that it needlessly expanded the law by imposing taxes on the fees collected by condominium corporations. In the same decision, the trial court failed to order the release of the amounts consigned by First E-Bank representing its alleged tax payments. First E-Bank and the BIR appealed to the Court of Appeals, which dismissed the appeals for lack of jurisdiction, stating that it was the Court of Tax Appeals that had jurisdiction over the petition as it involved the validity of a tax regulation.
On further appeal, the SC reversed and the resolutions of the appellate court and affirmed the decision of the trial court, finding RMC No. 65-2012 invalid. The Supreme Court also clarified that the amounts consigned by First E-Bank may be returned to it should the same be deemed proper via the institution of a separate action.
On the issue of whether or not the subject issuance was valid, the SC ruled in the negative. A condominium corporation was not engaged in trade or business. Citing Yamane v. BA Lepanto Condominium Corporation, 510 Phil. 750 (2005), it held that the collected fees could not be deemed profits as they were used to finance necessary expenses arising from the maintenance and preservation of a condominium corporation. The Court also stated that a perusal of Republic Act No. 4726, otherwise known as “The Condominium Act” (RA 4726), particularly Secs. 10, 22, and 9, reveals that the collection of fees was “a necessary incident to the purpose to effectively oversee, maintain, or even improve the common areas of the condominium as well as its governance.” RMC No. 65-2012 clearly deviated from the foregoing as it wrongly proclaimed that association dues, membership fees, and other assessment/charges paid by members/tenants of condominium corporations were part of taxable income.
RMC No. 65-2012 also erroneously enlarged the scope of taxable items under the law. A review of the Tax Code and the TRAIN Law shows that the fees collected by condominium corporations were not deemed as part of gross income. Hence, the fees could not be subjected to income tax.
Association dues, membership fees and other assessments/charges do not constitute payment for the performance of services. Citing ANPC v. BIR (G.R. No. 228539 (2019)), the Court emphasized that condominium corporations, like recreational clubs, could not be deemed to be selling its services to its tenants because the collected fees were used to defray the costs of the maintenance of the condominium premises. As such, they could not be subject to VAT.