Association Dues, Membership Fees, and Other Assessments/Charges Collected by Homeowners' Associations are Subject to Income Tax and VAT

The bureau has issued the Revenue Memorandum Circular No. 9-2013 to clarify the taxability of association dues, membership fees, and other assessments/charges collected by homeowners' associations from its homeowners-members and other entities.

The circular stated that under Income Tax - Section 18 of R. A No. 9904 which exempts from taxation the association dues and income derived from rental subject to certain conditions is an implied recognition by Congress that such receipts are subject to tax under existing laws. Thus, the amounts paid in as dues or fees by homeowner-members of a homeowners' association form part of the gross income of the latter subject to income tax. 

Besides, since a homeowners' association is subject to income tax, income payments made to it are subject to applicable withholding tax under existing regulations.

Moreover, it is also stated in the circular that associations dues, membership fees, and other assessments/charges collected by a homeowners' association are subject to VAT or Percentage Tax (wherever is applicable) since they constitute income payment or compensation for the beneficial services it provides to its homeowner-members.

Requisites of a Reasonable Retirement Benefit Plan

The requisites of a reasonable retirement benefit plan include the following:

1. It must be a definite written program setting forth all provisions essential for qualifications;

2. it must be permanent and continuing program unless sooner terminated by virtue of a valid business reason;

3. It must cover at least 70% of all officials and employees.

4. It must provide for the non-diversion of the corpus.

5. It must not provide for discrimination in contributions or benefits in favor of officials and employees who are officers, shareholders, supervisors or highly compensated officers;

Under Republic Act No. 4917, retirement benefits received by employees of private firms in accordance with a reasonable private benefit plan maintained by the employer are exempt from all taxes, provided that the retiring employees has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of hi retirement.

Keeping of Books of Accounts

Books of Accounts is classified into Manual Books of Account and Computerized Accounting Books/Record.

The following are required for keeping of books of accounts:

1. Corporation, companies, partnership or persons are required to keep books of accounts.

2. Quarterly sales, earnings receipts do not exceed P50,000 SIMPLIFIED Set of Bookkeeping Records.

3. Quarterly sales, earnings receipts exceed P50,000 - Journal and Ledger

4. Corporations, partnership, or persons whose gross quarterly sales, earnings, receipts exceed P150,000 shall have their Books of Accounts audited by independents CPA

The method of accounting use is Cash or Accrual Basis.

Besides, the preservation of Books of Accounts and other Accounting Records, all the books of accounts, including the subsidiary books and other accounting records or corporations, partnership, or persons, shall be preserved for a period of three (3) years beginning from the last entry in the book.

Remedies Available to the Taxpayer under the Tax Code in Connection with the Collection of Taxes

The remedies available to the taxpayer under the Tax Code in connection with the collection of taxes are as follows:

1. Administrative Remedies

a. Before payment
1. filing a petition for reconsideration or reinvestigation
2. entering into compromise

b. After payment
1. filing of claim for tax refund
2. filing of claim for tax credit

2. Judicial Remedies

a. Civil action
1.appeal to the Court of Tax Appeals
2. action to contest forfeiture of chattel
3. action for damages

b. Criminal action
1. filing of criminal complaint against erring Bureau of Internal Revenue Officials and employees.

Substantiation Requirements of Input tax

In general, the requirements of Input Tax are as follows:

1. Proof that the input tax was incurred in the course of trade or business.

2. Supported by VAT invoice or receipt bearing VAT number or seller.

3. Seller must be VAT registered.

4. Purchases must also be VAT registered.

5. Invoice must be in the name of the buyer.

6. Address of buyer is indicated.

7. Business style of buyer.

Substantiation requirements of Input Tax:

Input tax on importation:

1. Import entry or equivalent document.
2. Payment of VAT on imported goods (official receipts).

Transitional and/or Presumptive Input Tax:

1. Inventory of unused tax credits duly accounted in the books and returns.
2. Inventory of goods filed with the BIR

Input Tax on Deemed Sale Transactions:

1. Inventory filed with the BIR.

General Strategies in Tax Planning

The general strategies in tax planning that I have learned from a seminar years ago are as follows:

1. Timing of Income and deduction

2. Shifting of Income

3. Conversion of Income

4. Allocation of Deductions

5. Selecting the appropriate accounting methods

6. Use of excess Tax Credit

7. Monitoring of Input Tax

Effects of Fraud

With regards to the types of tax fraud cases, taxpayers should be reminded of the effects of fraud as follows:

1. Civil fraud results in the imposition of the 50% surcharge, to be imposed by the BIR;
2. Criminal fraud involves the imposition of penal sanctions to be imposed by the Regional Trial Court or the CTA, depending of the amount of basic tax, upon conviction;
3. The power of the Commissioner to assess the tax is extended to ten (10) s from the date of discovery of the falsity or fraud.
4. Cases involving fraud cannot be the subject of compromise;
5. The fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection of a fraud assessment that has become final and executory on the administration level;
6. Suspension and temporary closure of the business operations of a taxpayer...

Types of Tax Fraud Cases

Types of Tax Fraud Cases are as follows:

1. Criminal Fraud - A criminal tax fraud case results when all the elements of fraud can be proven beyond reasonable doubt. "Proof beyond reasonable doubt" does not mean such a degree of proof as absolute certainty, excluding possibility of error.

2. Civil Fraud - When all the elements of fraud cannot be proven beyond reasonable doubt, but these elements can be established by clear and convincing evidence amounting to more than a mere preponderance of evidence, civil fraud exists.

From routine examination of returns:

1. Keeping no records of inadequate records despite substantial transactions reflected in the returns;

2. Standard in living of the taxpayer, such as the possession of expensive cars and jewelries; or staying in luxurious mansion, and ownership properties whose values far exceed his probable sources of income as declared per return;

3. Records verified were not properly declared for the tax purposes;

4. False vouchers and receipts of the routine examination.

From information furnished by:

1. An informant who has knowledge of the transactions of the taxpayer which were not properly declared for tax purposes;

2. Referrals from other government offices or from other investigating units of the BIR.

Thru initiative of the investigating officers:

1. From newspaper reports;

2 Thru research of available government records such as from offices of the Register of Deeds, Bureau of Highways, and other government offices; and

3. In relation to an investigation of another taxpayer, where suspects that certain transactions were not declared for tax purposes.

Burden of Proof in Establishing Fraud

A tax fraud or evasion case is basically a criminal case. In the establishment of fraud, the burden of proof is on the BIR. The presumption that an officer of the government has performed his duty regularly, as in the case of the correctness of deficiency assessments, is not applicable in fraud cases. In criminal case, the burden of proof as to the offense charged lies on the prosecution.

Mere suspicions and doubts as to the intention of the taxpayer are not sufficient proof of fraud. Fraud is never presumed, it must be proved. As in felonies under the Revised Penal Code, the guilt of the accused for offenses under the Tax Code must be established beyond reasonable doubt.

Difference Between Tax Evasion and Tax Avoidance

Did you know that Evasion and Avoidance are sometimes used as synonyms in connection with tax matters?

A useful difference may, however, be drawn between them. Evasion should be applied to the escape from taxation accomplished by breaking the law - deliberate omission to report a taxable item, for example.

The term avoidance is the available to cover escaped accomplished by legal procedure which may be contrary to the intent of the tax law's sponsors but nevertheless do not violate the law.

Objectives of Effective Tax Management

Last year, I had attended a seminar somewhere in Mandaluyong City about Effective Tax Management (Tax Avoidance).

The speaker has shared about the Objectives of Effective Tax Management as follows:

1. To maximize Tax Benefits
2. To optimize Tax Deductions
3. To minimize Taxable Income
4. To avail all Tax Incentives
5. To avail Tax Remedies under the code
6. To comply all the requirements of the Bureau of Internal Revenue

Compliance (preventive)

1. Know the tax rules
2. Know how the rules
3. Maintain a high level of tax compliance
4. Secure your Tax
5. Get professional help

Assessments

1. Know your rights and remedies
2. Know the rules and process the assessment
3. Know best practices of handling assessment
4. Study and define your strategy
5. Get professional help

Collection

1. Know your rights and remedies
2. Know the rules and process of collection
3. Know your options

Favorable Settlement

1. Amnesty
2. Abatement
3. Compromise Settlement

Types of Withholding Taxes and Duties and Obligation of a Withholding Agent

Types of Withholding Taxes:

1. Withholding Tax on Gross Compensation
2. Expanded or Creditable Withholding Tax (Service Income / Purchases of Goods)
3. Final Withholding Tax (Passive Investment Income) - Interest, Dividends, Royalties, Prizes, Winnings and Capital Gain
4. Withholding Tax on Government Money Payment - Income Tax; VAT; Percentage Tax
5. Quarterly Withholding Tax - Individual Engage in Business or Profession; Corporation

Duties and obligations of Withholding Agent:

1.To deduct and withhold
2. To remit the tax withheld
3. To file withholding tax returns
4. To register
5. To issue withholding tax certificate

Duties and Privileges of employer and employee with regards to withholding tax on gross compensation:

Employer - Issues the proper withholding statement (BIR Form 2316) and include the employees in the Alphalist under Schedule 7.2 of BIR form no. 1604 CF. Salaries allowed as deductible expenses even without WT.

Employee - File ITR and pay income tax. If any, on or before April 15. Shall not qualify for Substituted Filing even if no tax payable at year end.

Deductibility of Charitable and Other Contribution from Gross Income

Charitable and other contribution were Corporation or association to whom contributions or gifts may be made or paid and claimed as deduction, the amount of which is subject to limitations.

The limitation is 5% for corporations and 10% for individuals, of the taxable income derived from trade, business or profession.

Besides, the valuation of deductible contributions is the amount of property other than money shall be based on the acquisition cost of the said property.

Contribution is deductible in full of the following:

1. Donation to the Government
2. Donation to Certain Foreign Institutions or Internal Organizations
3. Donation to Accredited Nongovernment organization

The term Nongovernment organization means a nonprofit domestic corporation

a. Organization operation exclusively for scientific research, educational, character-building and youth and sports development. Health, social welfare, cultural or charitable purposes.

Under Section 30 of the National Internal Revenue Code (NIRC), the following items are not deductible:

1. Personal, living or family expenses.
2. Any  amount paid out of new building or for permanent improvements, or betterment made to increase the value of any property or estate;
3. Any amount expanded in restoring property or in making good the exhaustion thereof for which an allowance is or has been made.

References: National Internal Revenue Code, Chapter VII Allowable Deductions, Section 34 (H); RR 13-1998