Luntian Multi-Purpose Cooperative

May 18, 2009 BIR RULING [COOP-(M-085) 318-09] R.A. 6938; DA-103-01 Luntian Multi-Purpose Cooperative Brgy. Lalig, Tiaong, Quezon Attention: Mr. Guillermo C. Atienza Admin. Officer Sir : This refers to your letter dated July 24, 2007 received by this Office by way of 1st Indorsement dated August 7, 2007 from Revenue Region No. 9, San Pablo City Legal Division OIC-Chief Oscar A. Aguilar, requesting the renewal of the cooperative's Certificate of Exemption previously granted by the Bureau of Internal Revenue, Revenue Region 9, San Pablo City under RDA-RR No. 98-01 dated October 10, 2001. It is represented that Luntian Multi-Purpose Cooperative ("LMPC") with Taxpayer Identification No. (TIN) 005-345-558 is a primarily agricultural multi-purpose cooperative registered with the Cooperative Development Authority (CDA) under Certificate of Registration No. LGA-1236 dated October 26, 1993; that the objectives and purposes for which it was formed are the following: "1. To encourage thrift and saving mobilization among the members for capital formulation; 2. To create funds in order to grant loans for productive and prudential purposes to its members; 3. To provide goods and services and other requirements of members; 4. To undertake agricultural and/or industrial product purposes; 5. To engage in the supply of production inputs to members/non-members and market their products; 6. To engage in which of the following medical, dental care, hospitalization, transportation, communication, housing, labor electric light and power, irrigation market management, janitorial services, etc.; 7. To promote the cooperative as a way of life for improving the social and economic well-being under a truly just democratic society; 8. To work with the cooperative movement, non-government and government organization entities in the promotion and development of cooperatives and in carrying out government policies; 9. To undertake other activities for the effective and efficient implementation of the cooperative code." DTAIaH that the cooperative was issued a Certificate of Tax Exemption by the Bureau of Internal Revenue, Revenue Region 9, San Pablo City under RDA-RR No. 98-01 dated October 10, 2001; that in said Ruling, the Regional Director of RR 09 was of the opinion that the exemption "shall be for a period of ten (10) years only reckoned from October 26, 1993, the registration of the cooperative with the CDA" or until October 26, 2003; that at the time of the issuance of said certification, the cooperative had accumulated reserves and undivided net earnings of not more than Ten Million (P10,000,000.00) Pesos; that the audited financial statements submitted in support of your request disclose that the cooperative has accumulated reserves and undivided net earnings of not more than Ten Million (P10,000,000.00) Pesos; and that it has submitted to this Office in support of its request the following documents: 1. Certificate of Registration with CDA; 2. Articles of Cooperation & By-Laws; 3. Certificate of Good Standing valid until April 15, 2009; 4. Certifications under oath by the Chairman to the effect that the Cooperative is: a) dealing with members only; and b) that at least 25% of the net income is returned to the members in the form of interest or patronage fund. 5. Certification of the List of Members and their capital contributions; 6. Photocopy of the Cooperative's latest Audited Financial Statements. In reply, please be informed that the purposes of the LMPC implies that it is transacting with members and non-members although a certification under oath from the General Manager states that it is transacting with members only, consequently, this Office is inclined to treat the Cooperative as transacting with both members and non-members in view of the purposes of said Cooperative. Article 62 of R.A. No. 6938 provides, viz. : "Art. 62. Tax and other Exemptions. Cooperatives transacting business with both members and non-members shall not be subject to tax on their transactions to members. Not withstanding the provisions of any law or regulations to the contrary, such cooperatives dealing with non-members shall enjoy the following exemption: (1) Cooperatives with accumulated reserves and undivided net savings of not more than ten million pesos (P10,000,000.00) shall be exempt from all national, city, provincial, municipal or barangay taxes of whatever name and nature. Such cooperatives shall be exempt from customs duties, advance sales tax or compensating tax on their importation of machinery, equipment, and spare parts, used by them and which are not available locally as certified by the Department of Trade and Industry. All tax-free importations shall not be transferred to any person until after five (5) years, otherwise, the cooperative and the transferee or assignee shall be solidarily liable to pay the amount of the tax and/or duties thereon." Likewise, Sec. 3 of Revenue Regulations (RR) No. 20-2001 dated November 12, 2001 provides, viz. : TcEaDS "Sec. 3. Exemption from Taxes. Taxability/exemption of duly registered cooperative dealing/transacting business with both members and non-members: 1. For cooperative with accumulated reserves and undivided net savings of not more than Ten Million Pesos (P10,000,000.00) a. Exemption from all national internal revenue taxes for which they are directly liable, as enumerated under Section 3.1 of these Regulations." From the foregoing, a cooperative dealing with both members and non-members is entitled to the exemptions provided therein on condition that its accumulated reserves and undivided net savings have not reached the threshold of P10 Million. Considering that LMPC's accumulated reserves or undivided net savings is not more than Ten Million Pesos (P10M) since the period starting from the expiration of its tax exemption in 1993 up to 2007, this Office therefore rules that LMPC continues to be exempt from income tax despite the expiration of its tax incentives on October 26, 2003. However, if LMPC's accumulated reserves or undivided net savings exceeds Ten Million Pesos in a particular taxable year, all its income derived from business transactions/dealings with non-members for that year shall be subject to the regular income tax. (BIR Ruling No. ECCP-020-2001 dated October 12, 2001 cited in BIR Ruling No. DA-281-2003 dated August 26, 2003) Moreover, LMPC's gross receipts from its lending activities shall continue to be exempt from value-added tax (VAT) pursuant to Section 109 paragraph (M) of the Tax Code of 1997, as amended. Likewise, LMPC's exemption from the 3% gross receipts tax under Sec. 116 of the same Tax Code shall continue to be in effect. LMPC continues to be exempt from the payment of the following taxes, to wit: 1. 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 cooperative; 2. Excise Tax under Title VI of the Tax Code of 1997, as amended; 3. Documentary Stamps 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 4. Annual Registration Fee of P500.00 under Section 236 (B) of the Tax Code of 1997, as amended. However, LMPC is hereby reminded that the above-cited tax exemption privileges granted to a cooperative do not extend to its individual members. Thus, members of cooperatives are liable to pay all the necessary internal revenue taxes under the Tax Code of 1997, including the tax on earnings derived from their capital contribution. The proper taxes shall be paid or withheld in the following cases: 1. In case the cooperative will distribute interest on capital, such interest shall be taxable to the recipient member, and shall be declared in his individual income tax return for tax purposes (Sec. 4 (B) (u) of Revenue Regulations No. 6-97); 2. Its interest income from Philippine currency bank deposits, yield from deposit substitutes, trust funds and similar arrangements, and royalties derived from sources within the Philippines shall be subject to 20% Final Tax imposed under Section 27 (D) (1) of the Tax Code of 1997, as amended. It shall also be taxed on prizes, winnings and net gains realized on sales or exchange of property. cSIACD 3. The cooperative shall be constituted as withholding agent if it acts as an employer and its employees received compensation income subject to withholding tax provided for in Section 79 of the Tax Code, as amended, or if it makes income payments to individuals or corporations subject to Expanded Withholding Tax provided for in Section 57 (B) of the Tax Code, as amended, and as implemented by Revenue Regulations No. 2-98, as amended. Further, LMPC are requested to file on or before April 15 of each year, a Profit and Loss Statement and Balance Sheet with Annual Information Return under oath, stating the LMPC's gross income and expenses incurred during the year, and a Certificate showing that there has not been any change in the By-Laws and Articles of Cooperation, in its manner of activities, as well as resources and disposition of income. A copy of this Letter of Exemption must be attached to the Annual Information Return which will be filed on said date. Finally, LMPC's Books of Accounts and other pertinent records shall be subject to periodical examination by Revenue Enforcement Officers of this Bureau for the purposes of ascertaining whether it complied with the conditions, under which it has been granted tax exemption or tax incentives and paid its tax liability, if any, pursuant to Section 235 of the Tax Code of 1997, as amended. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will 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