Association of Non-Profit Clubs, Inc. v. Bureau of Internal Revenue, G.R. No. 228539, June 26, 2019

 

Association of Non-Profit Clubs, Inc. v. Bureau of Internal Revenue, G.R. No. 228539, June 26, 2019 v.)

 

RECIT READY: Revenue Memorandum Circular No. 35-2012 was issued by BIR clarifying the taxability (particularly, income tax and VAT liability) of clubs organized and operated exclusively for pleasure, recreation, and other non-profit purposes based on the BIR's own interpretation of the NIRC provisions on income tax and VAT. Association of Non-Profit Clubs, Inc. (ANPC) filed a petition⁴ for declaratory relief assailing the correctness of the interpretation of BIR embodied in the circular. The court ruled that the interpretation was invalid. Membership fees are contributions for the maintenance of the clubs (part of the capital) and do not represent realized gains or profits. Therefore, these fees should not be classified as income subject to taxation. Meanwhile, membership fees, assessment dues, and the like are not subject to VAT because in collecting such fees, the club is not selling its service to the members. It is a basic principle that before a transaction is imposed VAT, a sale, barter or exchange of goods or properties, or sale of a service is required

 

Facts:

On August 3, 2012, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 35-2012. The circular stated that clubs 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 income tax component, 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.

The BIR justified this interpretation by citing the doctrine of casus omissus pro omisso habendus est, (a person, object, or thing omitted from an enumeration must be held to have been omitted intentionally,) arguing that the omission of the provision granting tax exemption to recreational clubs in the current NIRC indicated an intentional decision by Congress to subject these clubs to taxation.

On the VAT component it provides that provides 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

The BIR based this interpretation on Section 105 of the NIRC, which states that even non-stock, non-profit organizations are liable for VAT on the sale of goods or services.

In response to the circular, the Association of Non-Profit Clubs, Inc. (ANPC) and representatives from its member clubs met with BIR officials to discuss the implications of RMC No. 35-2012. Following this meeting, ANPC submitted a position paper requesting the non-application of the circular regarding income tax and VAT liabilities on fees collected from members. However, the BIR did not respond to this request (despite 2yrs lapse), and the member clubs were subjected to taxation; to income tax and VAT on all membership fees, assessment dues, and service fees.

Aggrieved, ANPC filed a petition for declaratory relief before the Regional Trial Court (RTC) of Makati City on September 17, 2014, seeking to declare RMC No. 35-2012 invalid, unjust, and in violation of the due process clause of the Constitution. ANPC argued that in issuing RMC No. 35-2012, the BIR acted beyond its rule-making authority in interpreting that payments of membership fees, assessment dues, and service v fees are considered as income subject to income tax, as well as a sale of service that is subject to VAT.

The RTC ruled in favor of the BIR, upholding the validity of RMC No. 35-2012. As to the substantive issue, the RTC found that given the apparent intent of Congress to subject recreational clubs to taxes, the BIR, being the administrative agency concerned with the implementation of the law, has the power to make such an interpretation through the issuance of RMC No. 35-2012

ANPC sought reconsideration which was denied. ANPC then filed a petition for review on certiorari before the Supreme Court. RULE 45

The BIR, represented by the Office of the Solicitor General (OSG), sought the dismissal of the petition, claiming that ANPC failed to exhaust available administrative remedies and that RMC No. 35-2012 was merely an amplification of existing tax laws.

There was no violation of the doctrine of hierarchy of courts. The correctness of the BIR's interpretation of the 1997 NIRC under the assailed RMC is a pure question of law because the same does not involve an examination of the probative value of the evidence presented by the litigants or any of them.

WHILE, the validity of RMC No. 35-2012 should have been first subjected to the review of the Secretary of Finance before ANPC sought judicial recourse with the RTC.

However, as exceptions to this rule, when the issue involved is purely a legal question (as above-explained), or when there are circumstances indicating the urgency of judicial intervention⁴¹ - as in this case where membership fees, assessment dues, and the like of all recreational clubs would be imminently subjected to income tax and VAT - then the doctrine of exhaustion of administrative remedies may be relaxed.

Legal Issues:

1. Whether or not the RTC erred in upholding in full the validity of RMC No. 35-2012. YES

w/n the interpretation of BIR is valid

w/n membership fees and assessment dues are considered as income subject to income tax

RULING:

 

ON THE INCOME COMPONENT

 

The interpretation on the income tax component is partly correct.

Indeed, applying the doctrine of casus omissus pro omisso habendus est (meaning, a person, object or thing omitted from an enumeration must be held to have been omitted intentionally⁴⁴) , the fact that the 1997 NIRC omitted recreational clubs from the list of exempt organizations under the 1977 Tax Code evinces the deliberate intent of Congress to remove the tax income exemption previously accorded to these clubs. As such, the income that recreational clubs derive "from whatever source"⁴⁵ is now subject to income tax under the provisions of the 1997 NIRC.

However, notwithstanding the correctness of the above-interpretation, 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.

As correctly argued by ANPC, membership fees, assessment dues, and other fees of similar nature only constitute contributions to and/or replenishment of the funds for the maintenance and operations of the facilities offered by recreational clubs to their exclusive members.⁵¹ They represent funds "held in trust" by these clubs to defray their operating and general costs and hence, only constitute infusion of capital

Case law provides that in order to constitute "income," there must be realized "gain."⁵³ Clearly, because of the nature of membership fees and assessment dues as funds inherently dedicated for the maintenance, preservation, and upkeep of the clubs' general operations and facilities, nothing is to be gained from their collection. This stands in contrast to the fees received by recreational clubs coming from their income-generating facilities, such as bars, restaurants, and food concessionaires, or from income-generating activities, like the renting out of sports equipment, services, and other accommodations: In these latter examples, regardless of the purpose of the fees' eventual use, gain is already realized from the moment they are collected because capital maintenance, preservation, or upkeep is not their pre-determined purpose. As such, recreational clubs are generally free to use these fees for whatever purpose they desire and thus, considered as unencumbered "fruits" coming from a business transaction.

For as long as these membership fees, assessment dues, and the like are treated as collections by recreational clubs from their members as an inherent consequence of their membership, and are, by nature, intended for the maintenance, preservation, and upkeep of the clubs' general operations and facilities, then these fees cannot be classified as "the income of recreational clubs from whatever source" that are "subject to income tax."⁵⁴ Instead, they only form part of capital from which no income tax may be collected or imposed.

It is a well-enshrined principle in our jurisdiction that the State cannot impose a tax on capital as it constitutes an unconstitutional confiscation of property. An income tax is arbitrary and confiscatory if it taxes capital because capital is not income.

 [T]he rule-making power of administrative agencies cannot be extended to amend or expand statutory requirements or to embrace matters not originally encompassed by the law. Administrative regulations should always be in accord with the provisions of the statute they seek to carry into effect, and any resulting inconsistency shall be resolved in favor of the basic law. Accordingly, the Court hereby declares the said interpretation to be invalid

 

ON THE VAT COMPONENT

 

The Court declares as invalid the BIR's interpretation in RMC No. 35-2012 that membership fees, assessment dues, and the like are part of "the gross receipts of recreational clubs" that are "subject to VAT."

 

It is a basic principle that before a transaction is imposed VAT, a sale, barter or exchange of goods or properties, or sale of a service is required.⁶² This is true even if such sale is on a cost-reimbursement basis.

Section 105. Persons Liable.- Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code.

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services.

The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity.

As ANPC aptly pointed out, membership fees, assessment dues, and the like are not subject to VAT because in collecting such fees, the club is not selling its service to the members. Conversely, the members are not buying services from the club when dues are paid; hence, there is no economic or commercial activity to speak of as these dues are devoted for the operations/maintenance of the facilities of the organization.⁶⁴ As such, there could be no "sale, barter or exchange of goods or properties, or sale of a service" to speak of, which would then be subject to VAT under the 1997 NIRC.

OTHER NOTES:

·         As a general rule, the power to tax is plenary and unlimited in its range; nevertheless, it is circumscribed by constitutional limitations (due process).

 

·         The State cannot impose a tax on capital as it constitutes an unconstitutional confiscation of property. An income tax is arbitrary and confiscatory if it taxes capital because capital is not income.1âшphiIn other words, it is income, not capital, which is subject to income tax.

 

·         Distinction between "capital" and "income

 

CAPITAL – "fund" or "wealth,"

INCOME -  the flow of services rendered by capital" or the "service of wealth":

 

The essential difference between capital and income is that capital is a fund; income is a flow. 

 

In Conwi v. Court of Tax Appeals, income may be defined as an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent. Income can also be thought of as a flow of the fruits of one's labor."