Desabelle, Robee Camille E.

LLB-3

1. Are monthly dues of condominium unit owners subject to income tax?

No, the TRAIN tax reform program includes various provisions that touch on
reducing personal income taxes while increasing taxes on products such as
sweetened beverages, oil, petroleum, and fuel products, coal, stock transactions, cars
and automobiles, among others.

Also included in the tax reform is the updating of VAT-able products and
transactions. The list of items that will or won’t be charged the 12% Value Added Tax
(VAT).
Products, service, or groups that will continue to be VAT-exempt
• Food and agricultural products
• Senior citizens
• Persons with Disability (PWD)
• Cooperatives
• Tourism
• Education
• Renewable energy
• Health
• Enterprises and BPOs located in Special Economic Zones
• Condominium association dues
• Rentals and leases below P15,000 per month

First, one of the basic premises in tax law is that “taxes are the lifeblood of the
nation”. Taxation, being one of the major powers of a sovereign, should be respected.
Being the price of a civilized society, as a general rule, the collection of taxes cannot
be stopped.

Another major principle in tax is that “exemptions are construed strictissimi juris
or strictly against the taxpayer.” On the flipside, if the tax on a particular transaction or
person is not specifically spelled out, no tax is due.

However, In the case of associations, they are treated like a corporation for tax
purposes. Thus, the income of a homeowners’ association from all sources should be
taxable, in the absence of an exemption which is specifically granted by law. The Court
of Tax Appeals (CTA) has ruled that condominium or association dues as well as other
fees collected from unit owners are not subject to income tax and withholding tax. The
CTA issued this ruling in response to a petition lodged by Officemetro Philippines Inc.
(formerly Regus Centres Inc.), appealing the deficiency income taxes imposed by the
Bureau of Internal Revenue (BIR).

Officemetro leased out office spaces in the Enterprise Center in Makati City. In
its petition, Officemetro asserted that out of the reported rental of P63.11 million, the
property services charges amounting to P8.85 million represent payments for
condominium dues which are not taxable income of a condominium corporation and
must therefore be excluded from the rental amount subject to expanded withholding
tax (EWT).
 The court agrees with petitioner. Condominium dues billed to the company are
not subject to EWT, the ruling said.

The BIR in its various rulings held that association or condominium dues,
membership fees and other assessment or charges collected from the members,
which are merely held in trust and which are to be used solely for administrative
expenses in implementing their purposes to protect and safeguard the welfare of the
owners, lessees and occupants, provide utilities and amenities for their members 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, the CTA said in a
21-page decision issued last June 3. This means that the same are not subject to
income tax and to withholding tax, the CTA said.

The BIR previously exempted condominium and homeowners associations

from the payment of income tax and VAT. This was premised on the theory that the
money collected was merely held in trust to be used for administrative expenses
incurred in servicing members and does not constitute any sale of goods or rendition
of service.

However, the government’s main tax collection agency reversed its previous
position and ruled that a condominium corporation or homeowners association
provides services and benefits to its members and thus, payments to it shall be
considered as income and consequently, must be subject to tax. Amid the uproar by
several homeowners associations and property firms, the BIR has softened its stand
on the collection of income and VAT out of the association dues, membership fees
and other charges paid by condominium and homeowners associations.

Under Revenue Memorandum Circular No. 9-2013, dues and membership fees
will not be taxed if the local government having jurisdiction over the homeowner
associations will certify that it has either no or insufficient funds to cover basic services
rendered by the homeowners to their members.

Condominium or homeowners associations must present proof that the dues

and fees are used for cleanliness, safety, security and other basic services needed by
members.

The homeowners organization must also be duly constituted as an association as

defined under Republic Act 9904 which grants tax incentives to homeowners
associations.

2. How is Real Estate Investment Trust treated for income tax purposes?

Under Philippine laws, a real estate investment trust or REIT is a stock

corporation established principally for the purpose of owning income-generating real
estate assets. What differentiates REITs from other real estate companies listed on
the stock market are the tax breaks specifically granted by the law.
 Just like regular corporations, REITs are subject to the 30 percent income tax
on its taxable net income. However, unlike regular corporations, only REITs can
deduct from its gross income the dividends distributed to shareholders. With 90
percent of the retained earnings required to be distributed as dividends, the corporate
income tax liability of the REIT is substantially reduced. A portion of the tax savings is
expected to translate to more distributable income to the shareholders, making the
REIT presumably a better investment alternative.

Issues inhibiting the development of the Philippine REIT

Despite the excitement during the passage of the REIT Act of 2009, we still
have a dearth in the REIT market. Stakeholders have identified reasons why they are
reluctant to form a REIT corporation. The primary issues identified were: (a) imposition
of the 12 percent value added tax on the transfer of real property to a REIT even if the
transfer is a tax-free exchange; (b) imposition of the 67 percent minimum public
ownership (MPO) rule; and (c) requirement of an escrow equivalent to corporate
income tax breaks, prior to the REIT’s compliance with the 67 percent MPO
requirement.

VAT exemption of tax-free exchanges

The TRAIN Law, or the tax reform package 1 law, has been blamed for almost
all of the increase in prices in most consumer goods in the market. But one amendment
introduced by the TRAIN law may help push the development of the REIT market in
the country.
Section 109 of the Tax Code has been amended to include transfers of property under
Section 40 (c) (2) of the Tax Code or tax-free exchanges as exempt from value added
tax.

With the above amendment of the Tax Code, stakeholders are expecting the
BIR to issue the amendment to Section 7 of Revenue Regulations No. 013-2011,
which imposed a 12 percent VAT on the transfer of property to the REIT even under
tax-free exchange conditions.

The TRAIN amendment directly addresses one of the main reasons cited by
property developers as hindrance to forming REIT corporations. With the amendment,
property owners can now transfer qualified real property assets to the REIT
corporations without incurring the 12 percent value added tax.

Possible decrease in the minimum public ownership requirement

The REIT law provided that the MPO shall not be less than one-third (1/3) of the
outstanding capital stock of the REIT. Pursuant to this, the implementing rules and
regulations issued by the SEC imposed an MPO equivalent to at least 40 percent of
the outstanding capital stock of the REIT in the initial year. This MPO must be
increased to 67 percent within three years from listing

Escrow requirement

Another requirement of the BIR that unnecessarily made setting up a REIT

inordinately expensive is the requirement that the income tax waived in the first two
years of operation in view of the dividend deduction be put in escrow, to be released
only upon showing that the REIT has achieved the required 67 percent MPO within
three years from listing. This requirement will needlessly tie up much needed capital
of the REIT, which should have been better used in the operations of the REIT.

It is clear that the prohibitive requirements of the regulations that were imposed
after the law has been passed have caused the inability of the REIT market to develop
in the Philippines. There can be no clearer proof of the detriment of the requirements
than the lack of REITs actively trading in the Philippines almost nine years from the
time the law has been approved.

The REIT Law granted incentives to the REIT to make the REIT an attractive
investment vehicle, with the end in view of democratizing wealth and opportunity. One
of the objectives is to enable ordinary investors to benefit from the booming real estate
market in the country.