First Laguna Electric Cooperative, Inc.

June 15, 2009 BIR RULING [COOP-(E-005) 376-09] PD 269, RA 6938; DA-318-08 First Laguna Electric Cooperative, Inc. Lumban, Laguna Attention: Mr. Evangelito S. Estaca Project Supervisor/Acting General Manager Gentlemen : This refers to your letter dated April 22, 2009 requesting for a permanent exemption from income tax pursuant to Presidential Decree No. 269. In reply, please be informed that Electric Cooperatives (ECs) registered with the National Electrification Administration (NEA) and/or Cooperative Development Authority (CDA) are exempt from the following: 1. Franchise tax under Section 119 of the Tax Code of 1997, as amended. (BIR Ruling No. DA-250-03 dated July 31, 2003); 2. Income taxes for which they are directly liable [P.D. No. 269, Sec. 39 (a) (1)]; 3. 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 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)]; and aAHSEC 4. Three Percent (3%) Percentage Tax under Sec. 116 of the Tax Code of 1997, as amended; 5. Donor's tax on donations to duly accredited charitable, research and educational institutions and reinvestment to socio-economic projects within the area of operation of the cooperatives; 6. Excise tax under Title VI of the Tax Code of 1997, as amended; 7. Documentary Stamp Tax imposed under Title VII of the Tax Code of 1997, as amended, provided, however, that the other party to the taxable document/transaction who is not exempt shall be the one directly liable for the tax; and 8. Annual Registration Fee of P500.00 under Section 236 (B) of the Tax Code of 1997, as amended. Being an electric cooperative registered with NEA, First Laguna Electric Cooperative, Inc. shall be exempt from the taxes aforementioned pursuant to P.D. No. 269 and R.A. No. 6938, as implemented by RMC No. 72-2003 dated October 20, 2003 and RR No. 20-2001 dated November 12, 2001, respectively. 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 aforequoted 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. DAHaTc 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. 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; 6. Value-added tax, on sales relative to the generation and distribution of electricity as well as their importation of machineries and equipment, including spare parts, which shall be directly used in the generation and distribution of electricity; and 7. All other taxes for which the ECs are not otherwise expressly exempted by any law. Upon the effectivity of R.A. 9337, the exemption from VAT of electric cooperatives was removed. Consequently, Revenue Regulations (RR) No. 16-2005, as amended by RR No. 4-2007, particularly Section 4.108-2 (13) and Section 4.108-3 (f) provide that sales of electricity by generation, transmission, and/or distribution companies are now subject to 12% VAT on their gross receipts. Provided, however, that sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels shall be subject to 0% VAT. Therefore, electric cooperatives are now subject to VAT on their gross receipts pursuant to R.A. 9337, as implemented by RR 16-2005, as amended. 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 First Laguna Electric Cooperative, Inc. by duly authorized internal revenue officers for internal revenue tax purposes only. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service