Acyatan & Co. Certified Public Accountants

February 10, 2009 BIR RULING [COOP-(E-002) 090-09] PD 269; RMC 72-2003; DA-108-2006; DA-125-2007; ECCP-009-2008 Acyatan & Co. Certified Public Accountants 12th Floor, The Columbian Tower Ortigas Avenue, Mandaluyong City Attention: Antonio P. Acyatan Chairman Gentlemen : This refers to your letter dated August 22, 2008 requesting on behalf of your client, Quezon 1 Electric Cooperative, Inc. for confirmation of your opinion that it is exempt from the payment of income tax for which it is directly liable, pursuant to Section 39 (a) (1) of Presidential Decree (P.D.) No. 269. aETDIc It is represented that Quezon 1 Electric Cooperative, Inc. ("QUEZELCO"), is a non-stock, non-profit electric cooperative organized under the provisions of Republic Act No. 6038, duly registered with the National Electrification Administration on April 24, 1972. That the cooperative is formed primarily for the purpose of supplying, promoting and encouraging the fullest use of electric service to its members in an area coverage basis, pursuant to the provisions of Republic Act No. 6038. In reply, please be informed that paragraph A (4) of RMC No. 72-2003, provides to wit: "A. Electric Cooperatives (ECs) registered with the National Electrification Administration (NEA) are exempt from: 1. . . .; 2. . . .; 3. . . .; 4. All National Government taxes and fees, including franchise, filing, recordation, license or permit fees or taxes. Provided, however, that the said exemption shall end on December 31 of the thirtieth full calendar year after the date of a cooperative's organization or conversion, or until it shall become completely free of indebtedness incurred by borrowing, whichever event first occurs. Provided further, that the period of exemption for a new cooperative formed by consolidation, as provided in Section 29 of P.D. No. 269, to begin from as of the date of the beginning of such period for the constituent consolidating cooperative which was most recently organized or converted under P.D. No. 269 [P.D. No. 269, Sec. 39(a)(2)];" (Emphasis supplied) In relation thereto, Section 39 of PD 269 provides, viz. : "SEC. 39. Assistance to Cooperatives; Exemption from Taxes, Imposts, Duties, Fees; Assistance from the National Power Corporation. Pursuant to the national policy declared in Section 2, the Congress hereby finds and declares that the following assistance to cooperatives is necessary and appropriate: (a) Provided that it operates in conformity with the purposes and provisions of this Decree, a cooperative (1) shall be permanently exempt from paying income taxes , and (2) for a period ending on December 31; of the thirtieth full calendar year after the date of a cooperative's organization or conversion hereunder, or until it shall become completely free of indebtedness incurred by borrowing, whichever event first occurs, shall be exempt from the payment (a) of all National Government, local government and municipal taxes and fees, including franchise, filing, recordation, license or permit fees or administrative proceeding in which it may be a party, and (b) of all duties or imposts on foreign goods acquired for its operations, the period of such exemption for a new cooperative formed by consolidation, as provided for in Section 29, to begin from as of the date of the beginning of such period for the constituent consolidating cooperative which was most recently organized or converted under this Decree; Provided, That the Board of Administrators shall, after consultation with the Bureau of Internal Revenue, promulgate rules and regulations for the proper implementation of the tax exemptions provided for in this Decree." (Emphasis supplied) From the afore-quoted provision of PD 269, it is clear that the exemption accorded to electric cooperatives registered with NEA is limited only until December 31 of the thirtieth full calendar year reckoned from the date of a cooperative's organization or conversion, or until it shall become completely free of indebtedness incurred by borrowing, whichever event first occurs. It should be noted, however, that exemptions covered by the 30-year period or until completely free of indebtedness refer only to No. 2 of Section 39 (a) of PD 269, i.e. , franchise tax, 3% percentage tax and other taxes. For purposes of internal revenue taxes, the percentage tax or franchise tax is deemed replaced by the VAT upon the effectivity of RA 9337 which imposes VAT on the sale of electricity. CDESIA The exemption of electric cooperatives from income tax, on the other hand, is permanent in nature as expressly provided in No. 1 of Section 39 (a) of PD 269. However, all ECs whether it be registered with the NEA or CDA, shall be subject to the following: 1. 20% final income tax on interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines; 2. 7.5% final income tax on interest income derived from a depositary bank under the expanded foreign currency deposit system; 3. Capital Gains Tax on sales or exchanges of real property classified as capital assets or shares of stock; 4. Documentary Stamp Taxes on transactions of ECs dealing with non-members when the accumulated reserves and undivided net savings of such cooperatives exceed Ten Million Pesos (P10,000,000.00); 5. VAT billed on purchases of goods and services not exempt; and 6. All other taxes for which the ECs are not otherwise expressly exempted by any law. Electric cooperatives, being distribution utilities, should have been subject to VAT on their gross receipts pursuant to RA 9337, as implemented by RR 16-2005, as amended, if not for the exemptions granted under No. 2 of Section 39 (a) of PD 269. ScTaEA It should be noted that nothing in the aforesaid RMC No. 72-2003 or RR No. 20-2001 shall preclude the examination of the books of accounts or other accounting records of QUEZELCO by duly authorized internal revenue officers for internal revenue tax purposes only. In view of the foregoing, this Office opines that the exemption of QUEZELCO from income tax is not among those tax exemptions being limited by No. 2 of Section 39 (a) of PD 269. Therefore, the income tax exemption of Electric Cooperatives registered with NEA is permanent in nature as expressly provided in Section 39 (a) of PD 269. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service