BIR Ruling [DA-029-06]

February 2, 2006 BIR RULING [DA-029-06] R.A. 6938 Capt. Vicente A. Lagura #67 4th Street Ecoland Subd. Davao City S i r : This refers to your letter dated December 16, 2005 seeking legal opinion on whether or not your proposed cooperative which will be engaged in pilotage services and loan services, is tax exempt pursuant to the provisions of Articles 61 and 62 of R.A. No. 6938, otherwise known as the Cooperative Code of the Philippines, as implemented by Revenue Regulations No. 20-2001, dated November 12, 2001. It is represented that you are a group of harbor pilots who are planning to organize yourselves into a cooperative; and that your primary objectives in forming a cooperative are to engage in pilotage services in the Port of Davao City and to grant loans to your members for productive or providential purposes. In reply, please be informed that subject to the conditions set forth in Revenue Regulations 20-2001, your proposed cooperative is exempt from ordinary income tax on its transactions with both owner-members and non-members provided that its accumulated reserves and undivided net savings are not more than Ten Million Pesos (P10,000,000.00) (Article 62 of RA 6938). Since it is exempt from income tax, your proposed cooperative is also exempt from creditable withholding tax pursuant to Section 2.57.5(B) of Revenue Regulations 2-98 as amended, which states that persons enjoying exemption from payment of incomes taxes pursuant to the provisions of any law shall likewise be exempted from the creditable withholding tax. Moreover, it is exempt from value added tax ("VAT") on its sale of services provided that the share capital contribution of each owner-member does not exceed fifteen thousand pesos [Sec. 109(u) of the Tax Code of 1997, as amended by Republic Act No. 9337, as implemented by Sec. (m) of Rev. Regs. 16-2005]. It is also exempt from 3% percentage tax provided under Section 116 of the Tax Code of 1997 and the annual registration fee of P500.00 under Section 236(B) of the Tax Code of 1997, but it is not exempt from registration. Your proposed cooperative is also exempt from donor's tax on donations to duly accredited charitable, research and educational institution, and reinvestment to socio-economic projects within the area of operation of the cooperatives. DTSaIc Your proposed cooperative is also exempt from payment of excise tax imposed under Title VI of the Tax Code. Your proposed cooperative's importation of equipment and machinery directly needed in the operation of its primary purpose is exempt from payment of duties and taxes provided it complies with the requirements of DOF-CDA Joint Circular No. 1-90. However, your proposed cooperative is liable to pay the 10% VAT billed to it on its purchases of goods and services because said tax is an indirect tax which can be passed on or shifted as part of the cost of the goods sold/services, rendered. In case it will distribute interest on capital, such interest shall be taxable to the recipient owner-member and shall be declared in his income tax return for tax purposes. Furthermore, the interest income of your proposed cooperative from currency bank deposits, yield from deposit substitutes, trust funds and similar arrangements and royalties derived from sources within the Philippines and the interest income which your proposed cooperative derives from a depository bank under the expanded foreign currency deposit system shall be subject to the 20% and 7.5% final tax, respectively, imposed under Section 271(D)(1) of the Tax Code of 1997. It shall also be taxed on capital gains realized on sales or exchanges of property. It is emphasized, however, that the exemption of the cooperative does not extend to the individual owner-members thereof. However, the advances received by owner-members are considered as payables and not income of the owner-members. Income, in a broad sense, means all wealth which flows into the taxpayer other than as return of capital (Section 36, Revenue Regulations No. 2). Income for tax purposes is the amount of money coming to a person or corporation within a specified time, whether as payment for services, interest, or profits from investment ( Fisher vs. Trinidad , 43 Phil 973.) The receipt of cash advance will not result to a flow of wealth because the owner-member will also recognize a liability. Since the advances are not considered as income, it is likewise not subject to income tax or creditable withholding tax, there being no income payment. The advances are not payment for services, interest or profits. The advances are also not subject to VAT since they are not derived from sale of goods or services. The service surplus of your proposed cooperative is income and subject to income tax. However, the share in the service surplus is not subject to withholding tax because it is not one of those income payments subject to withholding tax under Revenue Regulations 2-98, as amended. It is not compensation income and is, therefore, not subject to withholding tax on compensation, because it does not represent remuneration for services performed by an employee for his employer under an employer-employee relationship. (Sec. 2.78.1(A) Rev. Reg. 2-98). It is also not a professional or talent fee and the owner-members of the cooperative are not contractors. Neither is it one of those income payments subject to final withholding tax under Sec. 2.57.1 of Revenue Regulations 2-98. Moreover, the distribution of the share of the owner-members in the service surplus does not constitute a sale, barter or exchange of goods or services and is, therefore, not subject to value added tax. (Sec. 105 of National Internal Revenue Code of 1997) Finally, your proposed cooperative is required to file on or before the 15th day of the fourth month following the close of your accounting period a Certificate of Good Standing issued by the Cooperative Development Authority to your proposed cooperative together with the Annual Information Return and Financial Statements in accordance with Section 8 of Revenue Regulations 20-2001. AaCEDS 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 your proposed 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 Tax Code of 1997. (Section 9, Revenue Regulations 20-2001) 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, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service