BIR Ruling [DA-075-05]

March 9, 2005 BIR RULING [DA-075-05] RA 6938; DA-183-02 Alba Romeo & Co. Certified Public Accountants 7/F Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: Mr. Alba Romeo Gentlemen : This refers to your letter dated February 8, 2005 requesting for a ruling that the distribution of DMPI's net surplus to the owner-members is not subject to withholding tax and value added tax. It appears that DMPI Employees Agrarian Reform Beneficiaries Cooperative ( DMPI for brevity ) was organized on December 1, 1988 pursuant to Section 8 of RA 6657 otherwise known as Cooperative Agrarian Reform Law of 1988 and Presidential Decree No. 175; that the Cooperative was duly registered with then Bureau of Agricultural Cooperatives Development on December 6, 1988 and was confirmed by the Cooperative Development Authority (CDA) on April 19, 1991; that as a duly registered Cooperative in accordance with Republic Act No. 6938 (an Act to ordain a Cooperative Code of the Philippines) which took effect on April 1, 1990 and as provided for by Revenue Regulations No. 20-2001 dated November 12, 2001, it is exempt from payment of certain government taxes or fees imposed under the internal revenue laws and other tax laws; that a certificate of tax exemption was granted by the Bureau of Internal Revenue on July 18, 2002; that the purposes for which the cooperative was formed are the following: 1. To acquire, own, cultivate, develop and manage agricultural lands and other properties for the members and enter into any form of agreement or contract in pursuance hereof; 2. To teach the members a) the habit of thrift for capital build up; their duties and responsibilities as members of good standing of the cooperative; b) the fundamentals of financing, personnel and business management; c) Directors, committee men, officers and employees on the practices of cooperatives; d) the importance of paying their dues on time; 3. To accept funds, grants and donations for purposes of capital build-up of the cooperative; 4. To provide marketing services supply (sic) of agricultural inputs and other needs of the members at reasonable prices; 5. To work: a) with the Department of Agrarian Reform (DAR) and other government agencies in carrying out the Comprehensive Agrarian Reform Program (CARP) and other policies of the Government; and b) with other cooperative in organizing provincial, regional or national federation of cooperatives for any of the purpose or purposes for which this cooperative is formed and to become member of such federation of cooperative (sic) that may be organized later; and 6. To do related activities for the members of self-government, improved social and/or economic well-being under a truly just and democratic society. and that DMPI Cooperative is a cooperative organized and operated exclusively to its members. In reply, please be informed that pursuant to Section 3, Revenue Regulations No. 20-2001, a duly registered cooperatives dealing/transacting business with members only shall be exempt from paying the following taxes for which they are directly liable, viz : a. Income Tax on income from 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 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. Since the tax exemption of a cooperative dealing/transacting exclusively with members is limited to the above enumerated events, the distribution by DMPI of its net surplus is not exempt from tax. Accordingly, the share of the owner-members in the net surplus of DMPI is income and subject to income tax. However, the share of its members of the net surplus is not subject to withholding tax because it is not one of those income payments subject to withholding tax under Revenue Regulations No. 2-98, as amended. Furthermore, it is not a compensation income and is, therefore, not subject to withholding tax on compensation, because it does not represent remuneration for services performed under an employee-employer relationship. (Sec. 2.78. (A) Rev. Regs. 2-98). It is also not a professional or talent fee and the owner-members of the cooperative are not contractors. Neither it is one of those income payments subject to final withholding tax under Section 2.57.1 of Revenue Regulations 2-98, as amended. Moreover, the distribution of the share of the owner-members of the net surplus does not constitute a sale, barter or exchange of goods or services and therefore, the same is also not subject to value-added tax pursuant to Section 105 of the Tax Code of 1997. Finally, DMPI is 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 Cooperative Development Authority to DMPI together with the Annual Information Return and Financial Statements in accordance with Section 8 of Revenue Regulations No. 20-2001. 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 DMPI 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 No. 20-2001) (BIR Ruling No. DA-183-02 dated October 10, 2002) HSIADc 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. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group