Recreation, A Taxable Leisure By: Katrina Monserrat F.

Aznar

It is said that the purpose of recreation is not to kill time but to make life, not to keep a person occupied but to keep one refreshed, not to offer an escape from life but to provide an ultimate discovery of life. This discovery of life is such a part of the Filipino culture that the balance between work and pleasure is the ultimate aim for each Filipino individual.

This need for a balance of work and pleasure is a recognize industry in the Philippines. This booming business is clear in the widespread establishment of spas, country clubs, dinner clubs, sport clubs, and other recreational clubs. These recreational clubs are generally classified as either for profit or non-profit, and its taxability relies on this classification. Currently, however, this distinction for tax purposes between profit and non-profit recreational clubs disappears in line with the recent issuance by the Bureau of Internal Revenue (BIR) clarifying the taxability of clubs organized and operated exclusively for pleasure, recreation, and other non-profit purposes. You may ask, why the need for clarifications?

Revenue Memorandum Circular (RMC) No. 35-2012, dated 03 August 2012, explains that the National Internal Revenue Code of 1977 (old tax code) provides that clubs organized and operated existing exclusively for pleasure, recreation, and other non-profit purposes are exempt from income tax. This exemption, however, was deleted in the enactment of the National Internal Revenue Code of 1997, as amended (new tax code). Despite such deletion in the new tax code, however, various BIR rulings were issued declaring that these non-profit recreational clubs are exempt from income tax and Value Added Tax (VAT).

RMC No. 35-2012 categorically announced that because of the deletion in the new tax code specifically exempting non-profit recreational clubs from the list of non-profit organizations specifically exempted from income tax, the income of these recreational clubs from whatever source, including membership fees, assessment dues, rental income, and service fees are subject to income tax.

Likewise, RMC No. 35-2012 provides that the gross receipts of these recreational clubs are subject to VAT. It explains that under our VAT laws, as long as an entity provides for a fee, remuneration or consideration, then the service rendered is subject to VAT regardless if it receives payments for services rendered on a reimbursement on cost basis only. Unlike the laws in income tax which only taxes realized profit or gain, our VAT laws taxes all transactions in the regular conduct or pursuit of a commercial or an economic activity including transactions incidental thereto by any person or entity, regardless if whether

this entity is profit-oriented or not, whether or not these is a gain in the transaction being subjected to VAT.

Based on the above discussion, the RMC No. 35-2012 now revokes all previous ruling by the BIR granting exemptions to recreational clubs from income tax and VAT.

The clarification made by RMC No. 53-2012 will mean differently for each industry player involved.

On one end, the RMC would mean a positive turn of event for the BIR as it will provide them a source of revenue they can capitalize on. This source may not be technically new for the BIR as it has always been there, but the issuance of RMC No. 2012 will be an eye-opener for all Revenue Districts of the BIR on the opportunity to focus on the tax payments of non-profit recreational clubs previously enjoying tax exemption as a source of revenue to assist them in meeting their highly publicized collection budget. The RMC will also streamline the arena where murky interpretations of our tax laws can be used for tax evasion or avoidance hampering the national budget of the government, as this is one less area of unclear and indefinite application of Philippine tax laws.

On the contrary, RMC No. 35-2012 would entail higher tax payments of non-profit recreational clubs and consequently the possible lowering of their revenues that are generally used for the maintenance and improvements of the recreational clubs facilities.

It would also mean stricter monitoring of tax payments made by non-profit recreational clubs as well as the possible increase of tax investigations or assessments conducted by the BIR on non-profit recreational clubs who are still enjoying tax exemption regardless of the revocation made by the BIR when it issued RMC No. 35-2012. It would also entail the need for non-profit recreational clubs to review financials statements and the possible restructuring of cost and expenses to ensure that their funds are not compromised.