Business Mirror

Atty. Fulvio D. Dawilan discusses the non-taxability of association dues, membership fees and similar charges collected by associations from their members.

Assessment Dues, Membership Fees and Taxation

By Atty. Fulvio D. Dawilan

Do you manage or belong to an organization whose sources of funds are derived mainly from the dues and membership fees collected from members? If you do, then you must rejoice for you are freed from the watchful eye of the taxman.

To recall, prior to 2012, the tax bureau issued rulings consistently holding that association dues, membership fees and similar charges collected by associations from their members are exempt from taxes. The reason is that the amounts collected are merely held in trust to be used solely for the administrative expenses of the association and are not intended to result in gain or profit. Neither are these payments to the association for the performance of services or the sale, barter, exchange or lease of goods or properties.

In 2012 and 2013, the tax bureau made a 180-degree turn by issuing various interpretative rules in the form of memorandum circulars clarifying the taxation of association dues, membership fees and similar charges. The issuances targeted specifically clubs organized and operated exclusively for pleasure, recreation, and other nonprofit purposes (recreational clubs), condominium corporations and homeowners’ associations. The tax bureau, however, applied its new interpretation uniformly to all similarly situated organizations collecting membership fees and dues.

These new circulars sweepingly abandoned the previous interpretation, and held that the dues and fees are subject to tax. The reason is that the association is actually furnishing its members with benefits, advantages and privileges. And for such beneficial services provided to members, the amounts collected constitute income or compensation for services, which are subject to income tax and value-added tax (VAT) on the part of the association, and for which the member-payor has to withhold tax.

With respect specifically to recreational clubs, the tax bureau added a reason for the imposition of income tax—on the ground that a recreational club, which used to be included in the enumeration of exempt corporations in the 1977 Tax Code, was deleted in the same list when the 1997 Tax Code came into effect. And relying on the legal doctrine that a person, object or thing omitted from an enumeration must be held to have been omitted intentionally, the tax bureau justified that since recreational club is no longer included in the list of tax exempt corporations, its income from whatever source, including but not limited to membership fees, assessment dues, rental income and service fees are subject to income tax. For VAT, the tax bureau considered a recreational club, similar to other associations, as performing services to its members and is paid a fee for such services. And for as long as the club provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT.

This became the subject of a case [Association of Non-Profit Clubs Inc. v. Bureau of Internal Revenue, GR 228539, June 26, 2019] that reached the Supreme Court. The Court agreed that the omission in the 1997 Tax Code of recreational clubs from the list of exempt organizations evinces the deliberate intent of the legislature to remove the income tax exemption previously accorded to these clubs. As such, the income that recreational clubs derive from whatever source is subject to income tax. It is, however, incorrect to treat membership fees and assessment dues as sources of income of recreational clubs from which income tax liability may accrue.

Fine, the membership fees and dues are not subject to income tax. But the more important question to ask and answer is—why are these membership fees and dues not subject to income tax? In this case, the Court made a distinction between capital and income. Income is subject to income tax while capital is not. Membership fees and association dues are capital and not income. According to the Court, the essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called income. To constitute income, there must be realized “gain.” 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 the collection. For as long as these membership fees, assessment dues, and the like are treated as collections by 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 income. Instead, they only form part of capital from which no income tax may be collected or imposed.

For VAT, the tax bureau and the Court view the nature of the membership fees and dues differently. Both agree that for a transaction to be subject to VAT, it must constitute sale, barter or exchange of goods or properties, or sale of a service. And this is true even if such transaction is paid on a cost-reimbursement basis. This is also true even if the seller/provider is a nonstock and nonprofit organization. I may add that even if the transaction results in a loss, it is subject to VAT. The difference is in the appreciation of the nature of activities done by the association out of which the membership fees and dues are collected. To the tax bureau, there is a performance of service by the association to its members. Hence, the amount collected is subject to VAT. For the Court, the club is not selling its service to the members. As such, there is no transaction subject to VAT.

The verdict: corporations, organizations or associations operating for the benefits of its members are not liable to taxes for the receipt of association dues, membership fees and similar charges from its members, if such fees are merely held in trust for the benefit of the association and its members. However, the activities of such associations intended to earn profits shall be subject to tax. This is notwithstanding the inclusion or noninclusion in the Tax Code in the list of organizations exempt from tax and regardless of the actual use of the profit.

Can this decision be used as precedent for the exemption from tax by other organizations similarly situated? Yes, I believe so.