Ilocos Norte Provincial Government

November 25, 2009 BIR RULING [COOP-(M-159) 736-09] Section 62 of R.A. 6938; Section 109 Ilocos Norte Provincial Government Employees Multi-Purpose Cooperative Provincial Capitol Laoag City, Ilocos Norte Attention: Rosario E. Piedad Chairperson Gentlemen : This refers to your letter dated August 28, 2009 requesting for the issuance of a Certificate of Tax Exemption under Republic Act No. 6938, otherwise known as the "Cooperative Code of the Philippines". The facts, as you represent, are as follows: Ilocos Norte Provincial Government Employees Multi-Purpose Cooperative ("INPGEMC") is a multi-purpose cooperative duly registered with the Cooperative Development Authority ("CDA") on 18 January 1999 under Registration Certificate No. DAG-4013. Pursuant to its Articles of Incorporation, the objective of INPGEMC, among others, is to: 1) encourage thrift and savings mobilization among its members; and 2) provide quality consumer goods and services and other requirements of its members. It is further represented that INPGEMC has completely submitted on October 22, 2009 in support of its request and in compliance with Section 6 of Revenue Regulation No. 20-01 dated November 12, 2001 the following documents, viz. :1) Articles of Cooperation and By-Laws; 2) Certified true copy of the Certificate of Registration issued by the CDA; 3) Certificate under oath by the Chairperson that the Cooperative is transacting business with both members and non-members; 4) Original Copy of the Certificate of Good Standing from the CDA; 5) Certification under oath by the Chairperson duly attested by the Cooperative Development Authority as to the amount of accumulated reserves [Sixty Seven Thousand Seven Hundred Twenty Pesos and 43/100 (Php67,720.43)] and undivided net savings [Four Hundred Fifty-Eight Thousand Nine Hundred Sixty Two Pesos and 91/100 (Php458,962.91)],and that at least 25% of the net income is returned to the members in the form of interest and/or patronage refund; 6) Certification under oath of the list of members and the share capital contribution of each member (as of September 22, 2003, the share capital contribution of each of its owners-members does not exceed Fifteen Thousand Pesos (Php15,000.00);7) Latest financial statements duly audited by an independent CPA. TAcSCH In reply, please be informed that Article 62 of R.A. 6938 provides for the following: "Section 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 the law or regulation to the contrary, such cooperatives dealing with non-members shall enjoy the following tax exemptions: (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 or compensating taxes on their importation of machineries, 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 twice the amount of the tax and/or duties thereon. xxx xxx xxx (3) All cooperative, regardless of the amount of accumulated reserves and undivided net savings shall be exempt from payment of local taxes and taxes on transactions with banks and insurance companies: Provided, That all sales or services rendered for non-members shall be subject to the applicable percentage taxes except sales made by producers, marketing or service cooperatives: Provided further ,That nothing in this article shall preclude examination of the books of accounts or other accounting records of the cooperative by duly authorized internal revenue officers for internal revenue tax purposes only, after previous authorization by the Authority. ..." Likewise, Section 3.2 of Revenue Regulation No. 20-01 provides that: "3.2. Taxability/Exemption of duly registered cooperatives dealing/transacting business with both members and non-members: I. For cooperatives with accumulated reserves and undivided net savings of not more than Ten Million Pesos (P10,000,000.00) acAESC a. Exemption from all national internal revenue taxes for which they are directly liable, as enumerated under Sec. 3.1 of these Regulations. xxx xxx xxx Notwithstanding the foregoing, all income of the cooperative not related to its main/principal business/es shall be subject to all the appropriate taxes under the Tax Code of 1997. This is applicable to all types of cooperatives, whether dealing purely with members or both members and non-members. In any event, all types of cooperatives are required to register with the Bureau of Internal Revenue." From the foregoing, a cooperative dealing with both members and non-members is entitled to the exemptions provided therein on the 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 INPGEMC has complied with the conditions sine qua non provided under R.R. No. 20-2001, which is the Regulations implementing Article 62 of R.A. 6938, and that its accumulated reserves and undivided net savings do not exceed the threshold of P10 Million, this Office hereby grants this Certificate of Tax Exemption to INPGEMC from payment of the following, to wit: a. Income Tax on income from operations; b. Value-added tax (VAT) under Section 109 (N) of the Tax Code of 1997, as amended; c. 3% Percentage Tax under Section 116 of the Tax Code of 1997 on sales and services to members; (Section 62 (3) of R.A. 6938) d. 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; e. Excise tax under Title VI of the Tax Code of 1997; cHSIAC f. Documentary Stamp Tax imposed under Title VII of the Tax Code of 1997, 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 g. Annual Registration Fee of P500.00 under Section 236 (B) of the Tax Code of 1997. However, INPGEMC is liable to pay the 12% VAT on its 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. It has to be emphasized, however, that the above-cited tax exemption privileges granted to a cooperative does 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 INPGEMC 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. 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. It shall also be taxed on prizes, winnings and net gains realized on sales or exchanges of property. 3. Interest income from a depository bank under the expanded foreign currency deposit system shall be subject to 7.5% final withholding tax; (Section 4 of R.R. 20-01) 4. Sales or exchanges of real property classified as capital assets or shares of stock shall be subject to Capital Gains Tax; (Section 4 of R.R. 20-01) STaCIA 5. Where the accumulated reserves and undivided net savings of cooperatives dealing with non-members exceed Ten Million Pesos (P10,000,000.00),transactions shall be subject to Documentary Stamp Tax; 6. 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, 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, and as implemented by R.R. No. 2-98, as amended. Further, although INPGEMC is exempt from payment of annual registration fee, it is not exempt from the requirement of registration. Further, it is 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 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 it will file on said date. Finally, INPGEMC's books of accounts and other pertinent records, as well as the operations of the cooperative, shall be subject to periodical examination by Revenue Enforcement Officers of this Bureau for purposes of ascertaining whether it complies with the conditions under which it has been granted tax exemption or tax incentives and pays its tax liability, if any, pursuant to Section 235 of the Tax Code of 1997, as amended. It is, however, understood that the tax exemptions mentioned herein shall remain during the period that INPGEMC is in good standing as ascertained by the CDA on an annual basis. INPGEMC is also required to file on or before the 15th day of the fourth month following the close of its accounting period a Certificate of Good Standing issued by the CDA together with its Annual Information Return and Financial Statements in accordance with Section 8 of Revenue Regulations No. 20-01. 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 null and void. cCHITA Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service