Invalid imposition

RECENTLY, the Bureau of Internal Revenue (BIR) came out with several controversial issuances which are a reversal of long-standing practice and rulings. One of these issuances is Revenue Memorandum Circular No. (RMC) 65-2012, which took effect on Oct. 31, 2012.
   
RMC 65-2012 clarified the taxability of association dues, membership fees and other assessments/charges collected by condominium corporations from its members and tenants. The said RMC overturned rulings exempting condominium corporations from income tax and value-added tax (VAT), stating that these rulings misinterpreted the provisions of the 1997 National Internal Revenue Code (NIRC), as amended.

Condominium corporations cried foul, and several of them referred the issue to the Law Division of the BIR for further clarification.

However, First e-Bank Tower Condominium Corp. (petitioner) brought the matter before the courts to determine their obligation under RMC 65-2012.

On Sept. 5, 2013, the Regional Trial Court (RTC) Branch 146 of Makati City issued a Resolution declaring RMC 65-2012 as invalidly issued.

The RTC declared that the disputed RMC goes beyond its objective to clarify the existing statute for it did not merely interpret or clarify the existing BIR Rulings but in fact legislated or introduced new legislation under the mantle of its quasi-legislative authority. The RTC also stated that the RMC failed to show what particular law it clarified. Instead, it merely departed from the several rulings of the BIR exempting from income tax the assessments/charges collected by condominium corporations from their members, on the ground that the collection of association dues and other assessments/charges are merely held in trust to be used solely for administrative expense in implementing their purposes.

The RTC held that the new circular made its own legislation abandoning the previous rulings of the BIR, which became the practice of the condominium corporations, including the petitioner. The RMC abruptly charged taxpayers an imposition which was then non-existent, and worse, made it immediately effective, which is prejudicial to the rights of petitioner. In short, the BIR did not merely interpret or clarify but changed altogether the long standing rule of the BIR in violation of the petitioner’s right to due process.

While the RTC decision clearly stated that First eBank Tower Condominium Corp. is not liable for income tax and VAT on association dues it received from its members, the issue now is whether it can apply to other condominium corporations.

Note that the case filed before the RTC is an action for declaratory relief which is defined as an action by any person interested in a deed, will, contract or other written instrument, executive order, or resolution, to determine any question of construction or validity arising from an instrument, executive order or regulation, or statute, and for the declaration of his rights and duties thereunder [Ferrer vs. Roco, G.R. No 174129, July 5, 2010].

It is important to emphasize that an action for declaratory relief should be filed by a person interested under a deed, will, contract or other written instrument whose rights are affected by a stature, executive order, regulation or ordinance before breach or violation thereof [Tambunting vs. Spouses Baello, G.R. No. 144101, Sept. 16, 2005].

The Rules of Court state that the filing of a pleading, i.e., complaint or petition, initiates an action or proceeding. The filing of a petition is an invocation of the powers of the court to settle a controversy. The court will not and cannot acquire jurisdiction over persons or entities who did not submit to its authority. There must be an action filed by a person in interest for the court to decide on a matter of controversy between the parties to the case.

Thus, in this case where the RTC declared that RMC 65-2012 was invalidly issued, if the decision applies only to the petitioner as the par ty in the case, what would happen to condominium corporations who are similarly situated? Can these condominium corporations use the RTC decision as basis for refusing to pay income tax and VAT on collected association dues, membership fees and other assessments/charges even if the RTC did not acquire jurisdiction over them? We note that their rights and obligations under RMC 65-2012 were not ruled upon by the courts. However, the RTC clearly stated that the RMC was invalidly issued. If the RTC decision was binding only between the BIR and First e-Bank Tower, can an invalidly issued RMC be imposed on other condominium corporations?

In another case, a petition for declaratory relief to invalidate an ordinance declaring squatters as bona fide occupants wherein the squatters were not parties to the case, the Supreme Court declared that the reason for the law requiring the joinder of all necessary parties is that the failure to do so would deprive the declaration of the final and pacifying function the action for declaratory relief is calculated to subserve, as they would not be bound by the declaration and may raise identical issue. In this case, although it is true that any declaration by the court would affect the squatters, the latter are not necessary parties because the question involved is the power of the Municipal Council to enact the ordinances in question. Whether or not they are impleaded, any determination of the controversy would be binding upon the squatters [Baguio Citizens’ Action, Inc., et al, vs. The City Council and City Mayor of the City of Baguio, G.R. No. L-27247, April 20, 1983].

Will the Supreme Court decision find application in the case of condominium corporations like First e-Bank Tower? Are all condominium corporations bound by the RTC decision despite their exclusion from the case?

To claim that the nullity of RMC 65-2012 will only benefit the petitioner in the RTC case might lead to a violation of the constitutionally guaranteed right to equal protection of the law. Equal protection requires that all persons or things similarly situated should be treated alike, both as to rights conferred and responsibilities imposed. It demands that other condominium corporations, like the petitioner, should also not be made liable for taxes imposed by the invalidly issued RMC 65-2012.

Further, should other condominium corporations be inclined to file a similar declaratory relief action before any other RTC, the decision of RTC Branch 146 of Makati City should not be used as precedent. Note that actions for declaratory relief falls within the exclusive original jurisdiction of regional trial court and, under the principle of hierarchy of courts, a court cannot pass upon the validity of a decision of another co-equal court.

Questioning the legality of RMC 65-2012 is a worthy step to assert the rights of affected condominium corporations. The issue does not end in merely declaring that it was invalidly issued. To confirm the applicability of the RMC, a higher tribunal such as the Court of Appeals or the Supreme Court must still resolve not only the validity of RMC 65-2012, but also the applicability of the RTC decision so that the matter will, finally, be laid to rest.

Shirley C. Tuazon
Let's talk tax
Punongbayan and Araullo