BIR Ruling [DA-015-03]

January 27, 2003 BIR RULING [DA-015-03] S. 109 (u) DA-103-2001/6-1-01 Donato Em Santos & Zarate Suite 303 Greenbelt Mansion, 106 Perea Street Legaspi Village, Makati City. Attention: Demosthenes B. Donato, Esq. Gentlemen : This refers to your letter dated September 27, 2000 requesting for a confirmation of your opinion regarding the contemplated joint cleaning service contract venture between your client, SOLUTIONS AND INNOVATIONS, INC. (Company for brevity) as lead service contractor and SII MULTI-PURPOSE COOPERATIVE (Cooperative for brevity) as co-service contractor. Per your representation, the facts are the following: The Company is a stock corporation formed, organized and existing under the laws of the Republic of the Philippines with SEC Reg. No. A200005353 created for the primary purpose of providing recruitment and placement services, with a secondary purpose of providing janitorial and cleaning services. Its registration as a legitimate job contractor with the Regional Office of the DOLE pursuant to Secs. 19-24, Rule VIII-A, Book III of the Omnibus Rules Implementing the Labor Code, as amended by Department Order No. 10 (1997) is currently under process. The Cooperative is a multi-purpose cooperative in the process of incorporation for the combined purposes of engaging in the business activities of a credit cooperative, consumers cooperative, and service cooperative. It intends to secure appropriate registration as a legitimate job contractor with the Regional Office of the DOLE upon completion of the incorporation process. It is categorized as a primary cooperative with a minimum of 15 members who are natural persons. The contemplated transaction involves a joint service contract entered into by the Company and Cooperative, as lead service contractor and co-service contractor, respectively, with a project owner for the performance of cleaning works on per project basis. Under the joint venture arrangement, the Company contributes quality control and training services and provides all the requisite equipment, supplies and materials, while the Cooperative contributes the actual cleaning services. The Company performs its contractual obligations through its employees, while the Cooperative performs its functions through its working members. The contemplated sales and services are to be provided by the Cooperative to a non-member in the person of the project owner. The Cooperative does not have any accumulated reserves and undivided net savings at this time. Furthermore, its accumulated reserves and undivided net savings are not in any way expected to exceed more than P10,000,000.00 upon its commercial operation. The share capital contribution of each member stands at P1,000.00 at this time. Furthermore, said capital contribution is not in any way expected to exceed P15,000.00 upon its commercial operation. You now assert that the general cleaning services component provided by the Cooperative is exempt from the value added tax pursuant to Sec. 109(u) of the 1997 Tax Code and Art. 62(1) the Cooperative Code of the Philippines, as distinguished from the special cleaning services component (covering quality control and training services and supply of equipment, supplies and materials) provided by the Company that is subject to the value added tax. Moreover, in your letter dated June 19, 2001, you explained that the provision of services by the Company, together with the Cooperative, for the benefit of one client, does not constitute a taxable joint venture under Section 22(B) of the 1997 Tax Code because the scope of work and price/consideration from each service provider is distinct from and independent of the scope of work and price/consideration of the other. In other words, the Company and the Cooperative will each be entering into separate service contracts with the project client and therefore, the performance or non-performance of one service provider will not have any effect on the performance or non-performance of the other. In reply, please be informed that Section 109(u) of the 1997 Tax Code s pecifically provides that: "Sec. 109. The following shall be exempt from the value-added tax: xxx xxx xxx (u) Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with the Cooperative Development Authority: Provided, That the share capital contribution of each member does not exceed Fifteen thousand pesos (P15,000) and regardless of the aggregate capital and net surplus ratably distributed among the members." aEHASI Moreover, Art. 62(1) of the Cooperative Code of the Philippines states that: "Art. 62(1) 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 regulation to the contrary, such cooperatives dealing with non-members shall enjoy the 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." (Emphasis supplied.) Harmonizing the two aforecited provisions of law, the following underlying principles may be established: 1. Before a cooperative can avail of any exemption, it must first be duly registered with the Cooperative Development Authority. 2. The sales of goods and services by cooperatives to non-members are exempt from the value added tax if the share capital contribution of each member does not exceed P15,000.00, regardless of the aggregate capital and net surplus ratably distributed among the members; 3. The sales of goods and services by cooperatives to non-members are exempt from the value added tax if their accumulated reserves and undivided net savings do not exceed P10,000,000.00; Moreover, Section 3(3.2) of Revenue Regulations No. 20-2001 provides for the exemptions and conditions for exemption of duly registered cooperatives dealing or transacting business with both members and non-members. Thus, "3.2 Taxability/Exemption of duly registered cooperatives dealing/ transacting business with both members and non-members : 1. For cooperatives 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 Sec. 3.1 of these Regulations. xxx xxx xxx" Section 3.1 thereof enumerates the exemptions from taxes of a cooperative, viz : "a. Income Tax on income operations; b. Value-Added Tax (VAT) under Section 109 pars. (r), (s), (t) and (u) of the Tax Code of 1997; c. 3% Percentage Tax under Section 116 of the Tax Code of 1997; 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; 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" Accordingly, under the contemplated joint cleaning service contract venture between the Company as lead service contractor and the Cooperative as co-service contractor, the general cleaning services component provided by the Cooperative shall be exempt from the value added tax, as distinguished from the special cleaning services component (covering quality control and training services and supply of equipment, supplies and materials) provided by the Company which is subject to the value added tax, provided, however, that the precepts laid down above have been complied with to the letter, and provided finally that the accumulated reserves and undivided net savings should not exceed Ten Million Pesos (P10,000,000.00). This Office, likewise, confirms that the contemplated services by the Company and the Cooperative do not constitute a taxable joint venture under Section 22(B) of the 1997 Tax Code since the service to be rendered by the Company is distinct and independent from the services to be rendered by the Cooperative. The Cooperative, nonetheless, shall be subject to the taxes enumerated in Section 4 of Revenue Regulations No. 20-2001. It should likewise to emphasized that the exemption of the Cooperative does not extend to the individual members thereof. Moreover, the Cooperative shall be constituted as a withholding agent if it acts as an employer and its employees receive compensation income subject to the withholding tax, or if it makes income payment to individuals or corporations subject to the withholding tax provided for in Section 57 of the 1997 Tax Code. Furthermore, said members shall also be taxed on prizes, winnings and capital gains realized on sales or exchanges of properties. Finally, the Cooperative shall be required to file on or before the 15th day of the fourth month following the close of its accounting period a Profit and Loss Statement and Balance Sheet with Annual Information Return under oath stating its gross income and expenses incurred during the preceding period and a certificate showing that there has not been any change in the By-Laws, Articles of Cooperation, manner of activities as well as sources and disposition of income. A copy of this Ruling must be attached to the Annual Information Return that the Cooperative will file on or before said date. It is of course understood that its books of accounts and other pertinent records shall be subject to periodic examination by revenue enforcement officers of this Bureau for the purpose of ascertaining whether the Cooperative has been complying with the conditions under which it has been granted tax exemption or tax incentives and its tax liability, if any, pursuant to Section 235 of the 1997 Tax Code. ( BIR Ruling No. DA-103-2001 dated June 1, 2001 citing BIR Ruling No. 006-2001 dated February 22, 2001 ) 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 and the conditions set forth have not been duly complied with, then this ruling shall be considered void. TECIHD Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group