South Cotabato 1 Electric Cooperative, Inc.

October 26, 2009 BIR RULING [COOP-(E-009) 672-09] PD 269; RMC 72-2003; DA-108-2006; DA-125-2007 South Cotabato 1 Electric Cooperative, Inc. Matulas, Koronadal City, South Cotabato Attention: Santiago C. Tudio General Manager Gentlemen : This refers to your letter dated June 11, 2009, requesting exemption from taxes pursuant to Section 39 (a) of Presidential Decree (PD) No. 269 and Revenue Memorandum Circular (RMC) No. 72-2003. Documents submitted disclosed that South Cotabato 1 Electric Cooperative, Inc. (SOCOTECO 1, for short) with TIN: 000-940-174-00, is registered with the National Electrification Administration (NEA) as a non-stock, non-profit organization bearing Certification No. 039, issued on September 5, 1979; that it is a member-owned Rural Electric Cooperative (REC) pursuant to PD 269, as amended; that NEA granted SOCOTECO 1, the franchise to operate electric light, heat and power system in the areas presently compromised by the following municipalities: Barga, Koronadal, Norallah, Surallah, Tampakan and Tantangan, for a period of fifty (50) years from September 5, 1979 to September 5, 2029. In reply thereto, 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 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. IHCESD 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 depository 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. However, the current exemption from VAT of SOCOTECO 1 will end on December 31st of the thirtieth full calendar year after the date of SOCOTECO 1's organization or conversion, or until it shall become completely free of indebtedness incurred by borrowing, whichever event first occurs. CHIScD 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 SOCOTECO 1 by duly authorized internal revenue officers for internal revenue tax purposes only. In view of the foregoing, this Office opines that the exemption of SOCOTECO 1 from income tax is not among those tax exemptions being limited by No. 2 of Section 39 (a) of PD 269. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service