February 13, 2008

BIR RULING [DA-086-08]

57 (B), 105; DA-593-99

Greenfield Development Corporation

Greenfield Corporate Centre
98 United St., Mandaluyong City

Attention: Ms. Carloine R. Rodriguez

Comptroller

Gentlemen :

This refers to your letter dated September 5, 2006 stating that Greenfield
Development Corporation (GDC), is a domestic corporation organized to primarily
deal and engage in real estate business and is at present leasing commercial spaces at
EDSA Central Complex, that as an incident to the operation of its business

1. GDC incurs common area maintenance expenses, including but not

limited to electricity, air conditioning, water, janitorial, security, repairs
and maintenance. As an industry practice, these expenses are billed by
the utility or service providers (i.e. Meralco, Maynilad and GDC's
contractors), in which case GDC will issue billing statement to its
tenants to charge the above expense at cost on a pro-rata basis;

2. In the case of direct utilities and services, these are expenses directly
attributable to a tenant. For example, in case of repairs and maintenance
ascribed to a tenant's stall, the contractor for the repairs will send a
statement of account to GDC for the services rendered, that in turn,
GDC will issue a billing statement to that tenant for the expense
incurred;

3. For the electricity, LPG and water, GDC maintains a mother meter
which indicates the total utility consumption to be paid by GDC for a
certain period and GDC would initially advance the payment to the
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 utility companies and would then subsequently issue a billing statement
to its tenants using the individual sub-meters maintained by each tenant
as basis; ASHEca

4. No input tax related to the reimbursement shall be claimed by GDC.

5. The utility charges paid are allocated to each tenant based on actual
consumption but, nonetheless, does not constitute money or income
received by GDC.

You are of the opinion that reimbursement of expenses, by its very nature, is
not income but merely a return of capital and therefore not subject to income tax since
GDC never received any income from the transaction which can be the subject of any
tax (as clarified by Ms. Arlene Espiritu, GDC issues acknowledgment receipt for the
monies received from the tenants for the above-mentioned cost/expenses). Based on
the foregoing, you request for a confirmation that:

a) The monies received by GDC from its tenants as payments for direct
utilities and services are not subject to Value-Added Tax (VAT) and
Expanded Withholding Tax (EWT).

b) The monies received by GDC from its tenants as payment for Common
Area Maintenance (CAM) expenses are not subject to VAT and EWT.

In reply, please be informed that the payments received by GDC from its
tenants constituting the allocated share in the common costs or expenses and the
billings made by GDC at costs without any mark-up and which do not result in any
gain or profit should not be subjected to withholding tax. The said activity is rendered
without any added fee and is done merely to ensure administrative and operational
efficiency of the commercial spaces. The mode of advancing the payment and
subsequently collecting the same from the tenants as trustee of the fund intended for
payment of expenses for the common areas and utilities of the spaces is simply an
implementation of GDC's administrative function. Hence, this manner of collection
should likewise not be subjected to VAT, since GDC in this regard does not sell,
barter, exchange nor lease any goods or property and neither does it render any utility
services nor selling of goods, e.g. LPG to the lessees accommodated. ECcTaS

Moreover, any payment made by the tenants/lessees to GDC representing the

reimbursable costs or expenses shall not form part of the gross receipts of GDC and
therefore not an income subject to EWT and VAT as the said payment is intended for
costs of operation, administration, utilities, maintenance and repairs of the common
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 areas of the premises under lease for the benefit of the tenants who are ultimately
liable for the same.

It has been repeatedly opined by this Office that any payments collected for the
benefit of tenants/lessees do not constitute income subject to income tax, but are just
funds held in trust for the tenants/lessees.

The "trust fund" doctrine was applied in BIR Ruling No. DA-593-99 dated
October 7, 1999, to wit:

"In connection therewith, you now request for a ruling to the effect
that the receipts of the Regular Assessment billed to the unit owners of the
condominium building which are used solely for administrative expenses,
utilities and maintenance of the common areas do not form part of the . . .
Homeowner's Association taxable income subject to income tax and
consequently exempt from withholding tax.

In reply, please be informed that the . . . Homeowner's Association

receipt of the Regular Assessment from the unit owners which are merely held
in trust and which are to be used solely for administrative expenses, utilities
and maintenance of the common areas for the benefit of the said unit owners
and which the . . . Homeowner's Association could not realize any gain or
profit as a result of its receipt thereof are not includible in said Corporation's
gross income. Hence, the same is not subject to income tax and consequently
to the expanded withholding tax."

Furthermore, in BIR Ruling No. DA-008-2000 dated January 5, 2000, this

Office ruled that the receipt of . . . other assessments/charges collected from the
members, which are merely held in trust and which are to be used solely for
administrative expenses are not includible in the corporation's gross income, thus not
subject to income tax and consequently to the expanded withholding tax.

It is worthwhile to mention the following elements that should exist for income
to be taxable as enunciated by BIR Ruling No. 029-98 dated March 19, 1998: AcCTaD

1. There must be gain or profit;

2. The gain must be realized or received, actually or constructively; and

3. The gain must not be excluded by law or treaty from taxation.

The above-mentioned conditions are not fulfilled by the mere act of collecting

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 charges and assessments, as the said amounts are collected solely to fund
administrative, utilities and maintenance expenses of the common areas of a
commercial establishment. In the same manner, payments made by GDC's lessees as
reimbursements for costs of operation, administration, utilities, maintenance and
repairs of the common areas of the Edsa Central Complex are intended to benefit the
tenants of the said mall and should not therefore be subject to EWT.

Collection of fees and charges from the tenants for the maintenance of
common areas does not give rise to a sale of service subject to VAT. In VAT Ruling
No. 078-2001 dated October 29, 2001, it was ruled that the activity of collecting such
charges from unit owners as 'trustee' of the fund thereof, without any service fee is not
subject to VAT. Thus, the issuance of NON-VAT receipts for the same is in order.

Considering that GDC does not provide service for a fee, remuneration or
consideration, then the service rendered in the collection of direct utilities and
services as well as payment for the CAM expenses should also not be subject to the
EWT and VAT.

Finally, it is hereby emphasized that GDC shall not be entitled to any input
VAT attributable to assessments/charges for the costs of operation, administration and
utilities of individual lessees/tenants, as well as for the amount/charges for
maintenance and repairs of common areas, which amounts were initially billed to
GDC by the seller or provider of goods (LPGs) and services.

This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation, it will be ascertained that the facts are different, then
this ruling shall be considered as null and void. cDIHES

Very truly yours,

Commissioner of Internal Revenue

By:

(SGD.) JAMES H. ROLDAN

Assistant Commissioner
Legal Service

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