Any fool can make a rule, and any fool will mind it. 

― Henry David Thoreau, Author, Poet, Tax Resister


 

By Ernesto C. Perez II

 


 

Have you ever wondered if the monthly dues you are paying to your Homeowners’ Association (HOA) are taxable?

Why is there a need for your HOA to be registered with the Bureau of Internal Revenue (BIR) and be issued an official receipt duly registered with the BIR whenever you pay your monthly dues?

Should your HOA pay value-added tax (VAT) or not?

Find our the answers to these questions. Read on.

Revenue Memorandum Circular No. 9-2013 

BIR LogoJust recently, the BIR issued RMC No. 9-2013 “to clarify the taxability of association dues, membership fees, and other assessments/charges collected by homeowners’ associations from its homeowner-members and other entities” in lieu of the passage of Republic Act No. 9904, otherwise known as the “Magna Carta for Homeowners and Homeowners’ Association.”

In previous years, the monthly dues, other fees, assessment/charges homeowners’ association from its homeowner-members were EXEMPTED from paying INCOME TAX and VAT to the government.

Today, this is not the case anymore with the issuance of RMC No. 9-2013.

We must recall that Section 18 of RA 9904 grants tax incentives to homeowners’ associations subject to certain conditions. To remind us, Section 18 states the following:

“Section 18. Relationship with LGUs. – Homeowners’ associations shall complement, support and strengthen LGUs in providing vital services to their members and help implement local government policies, programs, ordinances, and rules.

“Associations are encouraged to actively cooperate with LGUs in furtherance of their common goals and activities for the benefit of the residents of the subdivisions/villages and their environs.

Where the LGUs lack resources to provide for basic services, the associations shall endeavor to tap the means to provide for the same. In recognition of the associations’ efforts to assist the LGUs in providing such basic services, association dues and income derived from rentals of their facilities shall be tax-exempt: Provided, That such income and dues shall be used for the cleanliness, safety, security and other basic services needed by the members, including the maintenance of the facilities of their respective subdivisions or villages.

x     x     x

Pursuant to RMC No. 9-2013, the amounts paid in as dues or fees by homeowner-members of a homeowners’ association form part of the gross income of the latter subject to income tax.

The rationale of this new interpretation is because a homeowners’ association furnishes its members with benefits, advantages, and privileges in return for such payments.

The BIR said, “For tax purposes, the association dues, membership fees, and other assessment/charges collected by a homeowners’ association constitute income payments or compensation for beneficial services it provides to its members and tenants.”

Therefore, since a homeowners’ association is subject to income tax, income payments made to it are subject to applicable withholding taxes under existing BIR regulations.

 

To VAT or not to VAT

According to RMC No. 9-2013, association dues, membership fees, and other assessment/charges collected by a homeowners’ association are subject to VAT since they constitute income payment or compensation for the beneficial services it provides to its homeowner-members.

The BIR supports this new ruling of making HOAs subject to VAT by stating that “even a non-stock, non-profit organization or government entity is liable to pay VAT on the sale of goods or services.”

Moreover, those exempt from the payment of VAT under Section 109 (v) of the NIRC and who is not a VAT-registered person are liable to pay percentage taxes under Section 116 of the NIRC.

 

Exemption under RA 9904 

RMC No. 9-2013 provides the guidelines on how the association dues and income derived from rentals of the homeowners’ associations’ properties may be exempted from income tax, VAT and percentage taxes. The following conditions are as follows:

1. The homeowners’ association must be a duly constituted “Association” as defined under Section 3 (b) of RA No. 9904;

2. The local government unit having jurisdiction over the homeowners’ association must issue a certification identifying the basic services being rendered by the homeowners’ association and therein stating its lack of resources to render such services notwithstanding its clear mandate under applicable laws, rules and regulations. Provided further, that such services must fall within the purview of the “basic community services and facilities” which is defined under Section 3 (d) of RA No. 9904 as those referring to services and facilities that redound to the benefit of all homeowners and from which, by reason of practicality, no homeowner may be excluded such as, but not limited to: security; street and vicinity lights; maintenance, repairs and cleaning of streets; garbage collection and disposal; and other similar services and facilities; and

3. The homeowners’ association must present proof (i.e. financial statements) that the income and dues are used for the cleanliness, safety, security and other basic services needed by the members, including the maintenance of the facilities of their respective subdivisions or villages.

When you read the conditions, it seems very restrictive, isn’t it? That is the way of the BIR, who is mandated to collect as much taxes as it can.

We note that the benefit of tax exemption would depend on the certification to be issued by the LGU having jurisdiction over the HOA. If you don’t have it, then the exemption will not apply.

What do you think about this? Share us your thoughts and comments about this topic. We would love to hear from you.