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1-ANPC v. BIR, G.R. 228539, June 26, 2019 Per J. Perlas-Bernabe

FACTS:
1. BIR issues RMC 35-012, “clarifying the taxability of Clubs organized & operated
exclusively for pleasure, recreation & other non-profit purposes”., to guide
revenue officials, employees, and others re enforcement of income tax & VAT
against clubs organized exclusively for pleasure, recreation and other non-profit
purposes (recreational clubs for brevity).
a. RMC states that recreational clubs are subject to income tax stating that
old tax exemption for recreational clubs in 1977 NIRC was omitted in the
1997 NIRC.
b. RMC states that “gross receipts of recreational clubs but not limited to
membership fees, assessment dues, rental income and service fees are
subject to VAT
2. ANPC invites BIR representative to discuss RMC effects. Upon BIR suggestion,
ANPC submits position paper, requesting non-application of income tax and
VAT liability on said fees. BIR did not act even after lapse of 2 years. ANPC
members were subjected to income tax and VAT.
3. Aggrieved, ANPC filed a petition for declaratory relief (Sept 17, 2014), to declare
RMC invalid, unjust, oppressive, confiscatory, and in violation of due process
clause. ANPC contended that BIR acted beyond its rule making authority in
interpreting that payments of such fees are considered income subject to income
tax as well as sale of service that is subject to VAT
4. Procedural
a. BIR seeks dismissal “ANPC violated the doctrine of hierarchy of courts
due to its direct resort before SC.
b. BIR asserts that ANPC violated doctrine of exhaustion of admin remedies,
pointing out that ANPC should have first elevated the matter to FINANCE
Secretary for review pursuant to Sec 4.
5. Substantive
a. RMC 35-012 interprets deletion of 1977 NIRC tax exemption to
recreational clubs in the 1997 NIRC to the effect that income of
recreational clubs from whatever source is subject to income tax.
b. ANPC contends that membership fees & assessment dues are not
subject to VAT. In collecting such fees, the club is not selling its service to
the members. The members are not buying services from the club when
dues are paid; hence, there is no economic or commercial activity to
speak of as these dues are devoted for the operations/maintenance of the
club’s facilities.

ISSUE: WON RTC erred in upholding full validity of RMC No 35-0212

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HELD: Petition partly meritorious.

1. Makati RTC order dated Nov 7, 2016 is set aside. C declares that membership
fees, assessment dues and fees of similar nature collected by clubs organized &
operated for pleasure, recreation and other non-profit purposes do not
constitute as
a. “the income of recreational clubs from whatever source” that are subject to
income tax”; and
b. Part of the “gross receipts of recreational clubs that are “subject to VAT”.
2. Accordingly, RMC 35-012 should be interpreted in accordance with this decision.
3. Procedural issues
a. No violation of doctrine of hierarchy of courts. PFR on certiorari filed,
pursuant to Sec 2c, Rule 45 is the sole remedy to appeal RTC in cases
involving pure questions of law. Doctrine is violated only when relief may
be had through multiple for a having concurrent jurisdiction over the case,
such as petition for CPM, which are concurrently cognizable either by
RTC, CA, or SC. The BIRs interpretation of the 1997 NIRC under the
assailed RMC is a pure question of law because the same does not
involve the examination of the probative value of the evidence presented
by the litigants or any of them. Thus, being the only remedy to appeal the
RTCs ruling in upholding the RMC validity on a purely legal question,
direct resort to SC through R45 petition, was correctly availed by ANPC.
b. No violation of the doctrine of exhaustion of admin remedies.
i. RMC 35-201 only clarified the taxability (particularly income tax and
VAT liability) of clubs organized and operated, exclusively for
pleasure, recreation, and other non-profit purposes based on the
BIR’s own interpretation of the NIRC of income tax and VAT. RMC
was not designated to “implement a primary legislation by
providing details thereof” but rather intended only to provide
“guidelines to the law which the admin agency is in charge of
enforcing,” as said RMC in fact addressed to “all revenue officials,
employees, and others concerned” to guide them in the
enforcement of income tax and VAT laws against fees collected by
the said clubs.
ii. Given nature of RMC, it is subject to admin review of FIN Sec per
Sec 4 NIRC which states that the power to interpret the NIRC
provisions and other tax laws shall be under the EOJ of the CIR,
subject to FIN Sec review. However, as exception to this rule, when
the issue involved is purely a legal question (as explained above) or
when there are circumstances indicating the urgency of judicial
intervention, as in this case, membership fees, assessment dues,
and the like of all recreational clubs would be imminently subjected
to income tax and VAT – then the EAR Doctrine may be relaxed.
ANPC’s recourse to the RTC and now before the SC are
permissible, and are not grounds to dismiss this case.
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4. Substantive issues
a. RMC 35-012 erroneously foisted a sweeping interpretation that
membership fees & assessment dues are sources of income of
recreational clubs from which income tax liability may accrue.
i. As correctly argued by ANPC, such fees represents funds held in
trust by these clubs to defray operating & general costs, and hence
nly constitute infusion of capital. These fees are paid by members
without any expectation of any yield or profit, but only for the above-
stated purposes and in order to retain their membership therein.
ii. In fine, for as long as such fees are treated as collections by
recreational clubs as an inherent consequence of their
membership, and are by their nature, intended for the maintenance,
preservation, and upkeep of the club’s gen facilities & operations,
then these fees cannot be classified as “income from whatever
source” that are subject to income tax. Instead, they form part of
capital from which no income may be collected or imposed.
iii. The State cannot impose a tax on capital as it constitutes an
unconstitutional confiscation of property. An income tax is arbitrary
& confiscatory if its taxes capital because capital is not income.
b. BIR exceeded its rule making authority with the sweeping inclusion of all
membership & assessment dues in its classification of “income from
recreational clubs from whatever source” that are “subject to income tax”.
i. The rule-making power of an admin agency cannot be extended to
amend or expand the statutory requirements or to embrace matters
not originally encompassed by the law. Admin regulations should
always by in accord with the provisions of the statute they seek to
carry into effect, and any resulting inconsistency shall be resolved
in favour of the basic law (CS Garment v CIR, 2014).
ii. SC declares as invalid said interpretation.
c. SC declares as invalid BIR’s interpretation in RMC 35-012 that said dues
are part of the “gross receipts of recreational clubs” that are “subject to
VAT”.
i. It is a basic principle that before a transaction is imposed VAT, a
sale, barter, or exchange of goods or properties or sale of service is
required. This is true even if such sale is on a cost-reimbursement
basis.
ii. ANPC aptly pointed out that membership fees & the like are not
subject to VAT. Members are not buying services from the club
when dues are paid. There could be no “sale, barter or exchange of
goods or properties, or sales of a service” to speak of, which would
then be subject to VAT under the 1997 NIRC.