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:
- 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."
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