Galaxy Service Cooperative

September 28, 2009 BIR RULING [COOP-(M-146) 624-09] RA No. 6938 & RR 20-01 Galaxy Service Cooperative 383 Chico Street Napico, Manggahan Pasig City Attention: Mr. Jaime S. Garcia Chairman Gentlemen : This refers to your letter dated July 13, 2009 requesting for a Certificate of Tax Exemption under the provisions of Republic Act (R.A.) No. 6938, otherwise known as the "Cooperative Code of the Philippines". As represented, you are a primary service cooperative with Taxpayer Identification No. 246-599-967-000. You are registered with the Cooperative Development Authority (CDA) Manila Extension Office under Certificate of Registration No. K-524-6020 issued on July 5, 2006. A Certificate of Good Standing No. MEO-CGS-2009-179 dated May 21, 2009 has been issued in your favor by Officer-in-Charge Manuel C. Lapea, Cooperative Development Authority, Manila Extension Office. The primary objective for which you were formed is "to engage in services particularly employment generation for its members". The following are your secondary objectives: 1. To actively support the government and other concerned organizations, both local and foreign, in promoting cooperatives as a practical means towards sustainable socio-economic development under a truly just and democratic society; 2. To develop the knowledge of the members on the principles and practices of cooperatives to enable them to actively and competently participate in managing the affairs of the Cooperative; ACcHIa 3. To institutionalize a dynamic savings mobilization and capital build-up schemes to sustain its development activities and long-term investments, thereby ensuring optimum economic benefits to the members, their families and the general public; 4. To implement policy guidelines that will ensure transparency, equitable access to its resources and services, and promote the interests of the members; and 5. To adopt such other plans as may help foster the welfare of the members, their families and the community. You submitted to this Office in support of your request and in compliance with Section 8 of Revenue Memorandum Circular No. 48-91 dated June 18, 1991, the following documents, viz. : (1) Certificate of Registration from CDA; (2) Certificate of Good Standing from CDA; (3) Articles of Cooperation & By-Laws; (4) Comparative Financial Statement for the Years 2007 and 2008; and (5) other pertinent documents. In reply, please be informed that 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. Notwithstanding 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. : EHITaS "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. If the accumulated reserves and undivided net savings exceed the threshold of P10 Million, the cooperative shall be exempt from income tax for a period of ten (10) years only counted from the date of registration with the CDA. Provided, further, that at least twenty-five percent (25%) of the net income of the cooperative is returned to the members in the form of interest and/or patronage refund. [Par. 3.2 (II) (a), Section 3 of RR No. 20-2001]. Considering that you have complied with the conditions sine qua non provided under RR No. 20-2001 dated November 12, 2001, which is the Regulations implementing Articles 61 and 62 of R.A. No. 6938, and that its accumulated reserves and undivided net savings do not exceed the threshold of P10 Million, this Office hereby grants you this Certificate of Tax Exemption from payment of the following, to wit: 1. Income tax on income from operations; 2. Value-added tax (VAT) under Section 109 (M) of the Tax Code of 1997, as amended; 3. Percentage tax under Section 116 of the Tax Code of 1997, as amended; 4. 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 (Sec. 62 (2) (d), R.A. No. 6938); EDHTAI 5. 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 (Sec. 173, Tax Code of 1997, as amended); and 6. Annual registration fee of P500.00 under Section 236 (B) of the Tax Code of 1997, as amended. It has to be emphasized, however, that the above-cited tax exemption privileges granted to a cooperative do not extend to its individual members. Members of cooperatives are liable to pay all the necessary internal revenue taxes under the National Internal Revenue Code, including the tax on earnings derived from their capital contribution. Thus, in case you will distribute interest on capital, such interest shall be taxable to the recipient member and shall be declared in his income return for tax purposes. 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 RR 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. 3. The cooperative shall be constituted as withholding agent if it acts as an employer and its employees receive compensation income subject to withholding tax provided for in Section 79 of the Tax Code of 1997, 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 same Code, and as implemented by RR No. 2-98, as amended. However, you are liable to pay the 12% VAT on your purchases of goods and services because the said tax is an indirect tax which can be passed on or shifted as part of the cost of the goods sold/services rendered. Although your are exempt from payment of annual registration fee, you are not exempt from the requirement of registration. Further, you 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 cooperative'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 your 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 you will file on said date. CacEIS Finally, your books of accounts and other pertinent records shall be subject to periodical examination by Revenue Enforcement Officers of this Bureau for purposes of ascertaining whether you comply with the conditions under which you have been granted tax exemption or tax incentives and/or pay your 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 disclosed that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service