Of floods; association dues and taxes

By Carlos Mateo, 29 August 2013

The recent floods in Luzon due to the incessant monsoon rains serve as a reminder that these calamities are inevitable in tropical countries such as ours. Because of climate change, the havoc they cause has intensified in magnitude over the last decade. While the government undertakes to implement a comprehensive anti-flooding program to address this bedevilling situation, realistically, full project completion may take several years without any guarantee of success.

Sparing no one, torrential rains have caused inundation even within prime real estate properties such as private subdivisions and enclave housing developments. However, unlike with public property, expenses for repairs of damages and maintenance costs in private subdivisions are shared by members of the homeowners’ association by way of membership contributions or annual dues.Unfortunately, costs of association dues have escalated this year as an aftermath of Revenue Memorandum Circular (RMC) No. 9-2013, issued this past Jan. 29 by the Bureau of Internal Revenue (BIR). Under the RMC, association dues are now subject to income tax and value-added tax (VAT) or percentage tax. The homeowners shoulder these new taxes through higher association dues.To further clarify the taxation of contributions, including those received from non-members, the BIR subsequently issued RMC 53-2013 this past Aug. 16. This latest circular explains that contributions received by homeowners’ associations may be treated either as gratuitous donations (subject to donor’s tax) or as onerous donations (subject to both income tax and VAT), depending on the circumstances. The latter will apply if the “donation” is given to the homeowners’ association in exchange for the performance of services, delivery of goods, or use of properties. If conditioned on a onerous cause, the contributions are not strictly donations or endowments, but are, in fact, in the concept of a fee or price paid in exchange for goods or services that must be subject to income tax and VAT or percentage tax.

Delving into the rationality of the BIR’s position, the question is if it is equitable to impose tax on association dues considering that the government (more particularly, the local government) generally does not share in the maintenance, repairs and community expenses of private subdivisions. Should homeowners’ associations be taxed for activities undertaken for the mutual aid and protection of their members?

Technically, one can argue that homeowners’ associations can be exempt from income tax as nonstock, nonprofit organizations providing benefits that accrue exclusively to its members (i.e. the homeowners). This is in accordance with Section 30 of the Tax Code, which provides income tax exemption to a beneficiary society, order or association, operating for the exclusive benefit of the members, with respect to income received by them as such.Further, there is basis to say that association dues should not to be subject to VAT since the charges were not collected in the ordinary course of trade or business of the homeowners’ association. Under its enabling law (Republic Act or RA 9904), Homeowners’ Associations are created to provide basic community services and facilities that will redound to the benefit of all homeowners (e.g., security; street and vicinity lights; maintenance, repairs and cleaning of streets; garbage collection and disposal). As such, they are not engaged in a commercial or economic activity that should be subject to any business tax.Unfortunately, unless the BIR reconsiders its position, the only recourse is to challenge the validity of these RMCs and their implementation (i.e. in the form of deficiency tax assessments issued against homeowners’ associations) in court.

For the meantime, recognizing the tax exemption provided under RA 9904 (the Magna Carta for Homeowners and Homeowners’ Associations), RMC No. 9-2013 does provide that association dues earned by homeowners’ associations may be exempted from income tax, VAT and percentage tax, subject to compliance with the following conditions:

  • that the homeowners’ association is duly constituted as defined by RA 9904, which includes registration with the Housing and Land Use Regulatory Board or HLURB;
  • that a certification is secured from the local government unit (LGU) stating that the LGU cannot provide the basic services required by the association; and
  • that the association must provide proof that the dues are used to provide such basic services.

To comply with the foregoing conditions, the homeowners’ associations may use the recent floods as an opportunity to secure the required certification from the concerned LGUs, particularly if the latter will not share in the cost of repairs of the damages incurred by the subdivisions.Without the tax exemption, regular dues covering basic services and goods for the upkeep of facilities will need to accommodate the cost of additional taxes. Thus, more than ever, homeowners have to be fastidious with their dues and their proper use by the duly elected officers and staff members of their homeowners’ association.

The author is a director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network. 

Views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from such article; the author will be personally liable for any consequent damages or other liabilities.