Case Summary (G.R. No. 215801)
The Revenue Memorandum Circular
RMC No. 65-2012 “clarified” that association dues, membership fees and other assessments collected by condominium corporations constitute gross income subject to: (a) 32% income tax, (b) 12% VAT, and (c) applicable withholding taxes, abandoning prior BIR rulings treating such funds as held in trust.
The Petition for Declaratory Relief
First E-Bank sought a declaratory judgment in RTC Makati to invalidate RMC No. 65-2012, alleging it imposed oppressive, confiscatory tax burdens on funds used exclusively for building maintenance.
Trial Court Ruling on Declaratory Relief
By resolution dated September 5, 2013, the RTC declared RMC No. 65-2012 invalid for expanding tax obligations beyond law and issuing it without notice or hearing, in violation of due process. The court noted the association dues’ long-standing treatment as non-taxable trust funds.
Appellate Proceedings Before the CA
Both parties appealed to the Court of Appeals. On June 26, 2014, the CA, citing Section 7(a)(3) of RA 9282, dismissed the appeals for lack of jurisdiction, concluding that the CTA has exclusive appellate jurisdiction over local tax cases. Motions for reconsideration were denied on November 27, 2014.
Jurisdictional Issue under RA 9282
Section 7(a) of RA 9282 grants the CTA exclusive appellate jurisdiction over: (1) BIR decisions on assessments; and (3) RTC decisions in local tax cases. The CA treated the RTC’s invalidation of RMC No. 65-2012 as a local tax case, hence within CTA’s exclusive jurisdiction.
Proper Remedy to Challenge Administrative Rules
The Court held that declaratory relief is not the proper vehicle to invalidate an administrative issuance of general application. Challenges to the validity or constitutionality of revenue regulations call for certiorari or prohibition under the Constitution’s judicial-review power, especially when the issue is of broad public interest.
Exclusive Jurisdiction of the CTA
Initially, British American Tobacco v. Camacho was read to preclude CTA from ruling on validity of tax laws or regulations. Subsequent rulings (City of Manila v. Grecia-Cuerdo; Banco de Oro v. Republic) recognized that the CTA, as a collegiate court with appellate jurisdiction, possesses all incidental powers to decide validity and constitutionality of tax measures, including revenue orders and circulars.
Substantive Invalidity of RMC No. 65-2012
RMC No. 65-2012 extended tax liability beyond what the NIRC prescribes. Neither the statutory definition of gross income (Section 32, RA 8424, as amended) nor VAT provisions (Sections 105–108) include association dues, membership fees or assessments collected by condominium corporations. By imposing income tax, VAT and withholding tax on these funds, the Circular modified the law rather than interpreted it, exceeding the Commissioner’s authority.
Nature of Condominium Corporations
Under the Condominium Act (RA 4726), a condominium corporation exists solely to hold and manage common areas for the joint benefit of unit owners on a non-profit basis. Yamane v. BA Lepanto confirmed that association dues are capital contributions for maintenance and not income-generating activities.
Taxability Analysis under the NIRC
- Income Tax: “Income” is gain separated from capital. Association dues fund maintenance, not profit, and are therefore not “gross income” under Section 32, RA 8424.
- VAT: VAT is levied on sales or services “in the course of trade or business.” A condominium corporation’s collection of dues for upkeep is neither a sale nor a service for consideration under Sections 106–108.
- Withholding Tax: Withholding applies only to specified passive or active income paid to persons. No income tax arises on dues; thus no withholding obligation exists.
Violation of Due Process and Excess of Authority
RMC No. 65-2012 was issued without notice and hearing, violating the taxpayer’s due-process rights. Its content ex
Case Syllabus (G.R. No. 215801)
The Twin Cases
- G.R. No. 215801: Petition for Review filed by the Bureau of Internal Revenue (BIR)
- G.R. No. 218924: Special Civil Action for Certiorari filed by First E-Bank Tower Condominium Corp.
- Both challenge the Court of Appeals’ resolutions dismissing the parties’ appeals for alleged lack of jurisdiction
Procedural History
- Regional Trial Court (RTC), Branch 146, Makati City: First E-Bank’s petition for declaratory relief raffled and resolved
- RTC issued a Resolution (September 5, 2013) declaring RMC No. 65-2012 invalid, and an Order (December 18, 2013) denying motions for reconsideration
- Court of Appeals:
• June 26, 2014 Resolution dismissing both appeals for lack of jurisdiction
• November 27, 2014 Resolution denying motions for reconsideration - Supreme Court: Consolidated petitions under Rule 45 (BIR) and Rule 65 (First E-Bank)
Facts
- First E-Bank is a non-stock, non-profit condominium corporation managing an office building
- On October 31, 2012, BIR issued Revenue Memorandum Circular No. 65-2012 (RMC No. 65-2012)
- RMC No. 65-2012 purported to clarify that association dues, membership fees, and other assessments/charges collected by condominium corporations are:
• Subject to 32% income tax as gross income (Section 31, RA 8424)
• Subject to 12% value-added tax (VAT) under Sections 105–108, RA 8424
• Subject to applicable withholding taxes on income payments
Revenue Memorandum Circular No. 65-2012
- Income Tax Clarification:
• Dues and fees “form part of the gross income” of the condominium corporation
• Abandonment of prior “held in trust” interpretation
• Withholding taxes apply to payments made - VAT Clarification:
• Dues and fees “constitute income payment or compensation for beneficial services”
• All persons “in the course of trade or business” liable for VAT, including non-stock, non-profit entities (Section 105, RA 8424)
• Cites CIR v. Court of Appeals and Commonwealth Management and Services Corporation (G.R. No. 125355, March 30, 2000)
First E-Bank’s Allegations
- RMC No. 65-2012 imposed immediate and ongoing VAT (P118,971.53/month) and income tax (P665,904.12/year) on dues
- These taxes burden unit owners’ own funds for building maintenance
- RMC is “oppressive and confiscatory,” requiring additional contributions
- First E-Bank, via the Makati Commercial Estate Association, requested deferment and judicial consignation under protest
BIR’s Comments
- RMC No. 65-2012 was already in effect; injury had occurred (prematurity objection)
- Declaratory relief improper once regulation is implemented
- Primary jurisdiction lies with the Secretary of Finance and BIR Law Division (principle of primary jurisdiction)
First E-Bank’s Reply
- Judicial consignation of disputed tax payments was necessary to prevent enforcement and preserve rights
Trial Court Ruling (RTC Branch 146, September 5, 2013)
- Petition for declaratory relief was the correct remedy to invalidate RMC No. 65-2012
- RMC No. 65-2012 goes beyond mere clarification:
• Creates new tax burdens not found in the National Internal Revenue Code (NIRC)
• Issued without not