The Supreme Court has ordered the Bureau of Internal Revenue to exclude from income and value-added taxes the membership fees, assessment dues, and other fees collected by clubs, which are organized and operated exclusively for pleasure, recreation and other non-profit purposes.
In a decision penned by Associate Justice Estela M. Perlas-Bernabe, the SC granted the petition of the Association of Non-Profit Clubs, Inc. seeking to invalidate BIR’s Revenue Memorandum Circular No. 35-2012 dated Aug. 3, 2012.
RMC No. 35-2012, entitled “Clarifying the Taxability of Clubs Organized and Operated Exclusively for Pleasure, Recreation, and Other Non-Profit Purposes,” states that “clubs which are organized and operated exclusively for pleasure, recreation, and other non-profit purposes are subject to income tax under the National Internal Revenue Code (NIRC) of 1997, as amended.”
On the value-added tax component, the circular states that “the gross receipts of recreational clubs including but not limited to membership fees, assessment dues, rental income, and service fees are subject to VAT.”
In ruling against the BIR, the SC ruled that such dues and fees “do not constitute as ‘the income of recreational clubs from whatever source’ that are ‘subject to income tax’ and part of the ‘gross receipts of recreational clubs’ that are subject to value added tax (VAT).”
With the ruling, SC directed the BIR to realign its Aug. 3, 2012 Memorandum Circular No. 35-2012 in accordance with its decision that granted the petition of the Association of Non-Profit Clubs Inc.
In issuing the circular, the BIR said that the provision in the 1977 Tax Code which granted income tax exemption to such recreational clubs was omitted in the current list of tax-exempt corporations under the 1997 NIRC, as amended.
Because of this, the BIR said “the income of recreational clubs from whatever source, including but not limited to membership fees, assessment dues, rental income, and service fees are subject to income tax.”
On VAT, the BIR relied on Section 105, Chapter I, Title IV of the 1997 NIRC, which states that even a non-stock, non-profit private organization or government entity is liable to pay VAT on the sale of goods or services.
The ANPC held a dialogue with the BIR in October 2012. The association was asked to submit its position paper on the issue.
When the BIR did not act on its request after two years, ANPC filed on Sept. 17, 2014 a petition for declaratory relief with the Makati City regional trial court to declare the RMC No. 35-2012 “invalid, unjust, oppressive, confiscatory, and in violation of the due process clause of the Constitution.”
The Office of the Solicitor General opposed ANPC’s petition citing, among other things, the association’s failure to exhaust administrative remedies.
On July 1, 2016, the RTC dismissed ANPC’s petition as it upheld the validity and constitutionality of the BIR’s circular. It also denied the group’s motion for reconsideration, prompting ANPC to bring the issue before the SC.
“While the 1997 NIRC omitted recreational clubs from the list of exempt organizations under the 1977 Tax Code…, RMC No. 35-2012 erroneously foisted a sweeping interpretation that membership fees and assessment dues are sources of income of recreational clubs from which income tax liability may accrue…” the SC declared.
The decision cited rulings in previous cases which made distinctions between “capital” and “income.” It said “capital” has been delineated as a “fund” or “wealth” as opposed to “income” being “the flow of services rendered by “capital” or the “service of wealth.”