Taxation of Non-profit Clubs for Pleasure and Recreation

By: Garry S. Pagaspas

The Bureau of Internal Revenue (BIR) has issued Revenue Memorandum Circular No. 35-2012 (RMC 35-2012) dated August 3, 2012 entitled “Clarifying the Taxability of Clubs Organized and Operated Exclusively for Pleasure, Recreation, and Other Non-profit Purposes”.

RMC No. 35-2012 has been issued by the BIR to clarify the income taxation and value added tax of clubs organized and operated exclusively for pleasure, recreation, and other non-profits purposes or “recreational clubs” as follows:

Income tax of recreational clubs

Under Section 26(H) of Presidential Decree No. 1158 otherwise known as National Internal Revenue Code of 1977, clubs which are organized and operated exclusively for pleasure, recreation, or other non-profit purposes or referred to as recreational clubs are exempt from income tax. However, under the National Internal Revenue Code of  1997, such provision was not included and under the doctrine of “casus pro omisso habendus est” a person or object that is omitted from an enumeration must be held to be omitted intentionally.

As such, the income tax will apply to the income of the recreational clubs from whatever source, such as the following:

• membership fees;
• assessment dues;
• rental income; and,
• services fees

Value added tax of recreational clubs

Likewise, the BIR clarified that the recreational clubs is subject to 12% VAT under Section 105 of the 1997 Tax Code, as amended and the fact that they are registered as a non-stock and non-profit would be immaterial. Quoted is the provision on Section 105 for easy reference:

“SEC. 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. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716.

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 non-stock, 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.

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being course of trade or business.” (emphasis supplied)

BIR further clarified that such conclusion has been affirmed by the Supreme Court in the case of Commissioner of Internal Revenue vs. Court of Appeals and Commonwealth Management and Services Corporation (GR No. 125355 dated March 30, 2000) which held as follows:

“It is immaterial whether the primary purpose of a corporation indicates that it receives payment for service rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of determining liability for VAT on services rendered. As long as the entity provides service for a fee, remuneration, then, the service rendered is subject to VAT.”

As such, the BIR concluded that clearly, the gross receipts of recreational clubs including but not limited to membership fees, assessment dues, rental income, and services fees are subject to VAT.

Comments:

RMC 35-2012 is premised on the rule that what has been excluded in the enumeration of exempt transaction, is deemed excluded. As such, they are taxable. Please note that, taxation is the rule, and exemption is the exception for the rule. It is Section 30 of the 1997 Tax Code that enumerates income tax exempt corporations. Being a taxable entity, payment to recreational clubs are not subject to  the expanded withholding tax. This would mean to show that not-all non-stock and non-profit are exempted from income tax. Only those that are specifically enumerated are exempted. It might be good this time to revisit your non-stock and non-profit structure to check whether the same is exempted. If not among those enumerated, you may consider a domestic corporation for the business. You may read this article as a guide – Overview of Domestic Corporations in the Philippines. 

As to being subjected to VAT, the same is imposed upon the nature of activity and has nothing to do with the structure as non-stock and non-profit activities. Recreational services are VATable as a sale of service.

Finally, I would agree with the recent move of the BIR to revisit the tax treatments of certain industries and transactions of taxpayers in the Philippines. I go with the notion that new taxes may not be necessary under the proper implementation. I would expect more BIR issuance for clarifications on taxability. As such, I would advise taxpayers to be more alert in dealing with their taxes. I would encourage their education on tax compliance to avoid misapplication and save taxes. Of course, there could be a lot more ways to learn BIR tax compliance.

Related readings

• Basic Income Taxation of Corporations in the Philippines
• Overview of Value added Tax in the Philippines

Read the FULL text of RMC No. 35-2012.Taxation of Non-profit clubs for recreation

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(Garry S. Pagaspas is a Resource Speaker with Tax and Accounting Center, Inc. He is a Certified Public Accountant and a degree holder in Bachelor of Laws engaged in active tax practice for almost two (2) decades and a professor of taxation for more than five (5) years. He had assisted various taxpayers in ensuring tax compliance and tax management resulting to tax savings rendering tax studies, opinions, consultancies and other related services. For comments, you may please send mail at garry.pagaspas(@)taxacctgcenter.ph).

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may also please send mail at info(@)taxacctgcenter.ph, or you may post a question at Tax and Accounting Center Forum and participate therein.

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