Valmores Valmores & Valmores Law Offices

February 22, 2007 BIR RULING [DA-113-07] DA-183-02; Secs. 27 (D) (1), 105, 109 (n), 236 (B), NIRC; R.R. 20-2001; Art. 62, R.A. 6936 Valmores Valmores & Valmores Law Offices 2nd Floor COCOFED Building, No. 144 Amorsolo St., Legaspi Village, Makati City Attention: Jose Ismael B. Valmores Gentlemen : This refers to your letter dated January 9, 2007, requesting for a ruling as to the taxes your client-cooperative is subject to under Articles 61 and 62 of Republic Act (RA) No. 6938 and Revenue Regulations (RR) No. 20-2001. It is represented that Helping Hand Manpower Multipurpose Cooperative (Helping Hand) is a multi-purpose cooperative duly registered with the Cooperative Development Authority on January 12, 2006 with Registration Certificate No. LGA-6596; and that based on its Articles of Cooperation, it has, among others, the following primary purposes: (1) To encourage thrift and savings mobilization among the members for capital formation; and (2) To engage in providing sources of livelihood to the members. CTAIHc It is further represented that Helping Hand is comprised of workers and professionals with work experience and aptitude in diversified service functions and industrial operations. The service personnel assigned to client companies nationwide are production workers, warehouse helpers, machine operators and the like. Based on its structure and nature, Helping Hand deals with both owner-members and nonmembers. The service personnel assigned to client-companies are all co-owners of Helping Hand, and its members are no longer worker-employees. Instead of traditional employment, they are now entrepreneurs contributing their services to Helping Hand toward mutually beneficial business opportunities and partnerships with clients. Its owner-members also receive numerous benefits, and they periodically receive their corresponding share in its service surplus. Helping Hand derives its service surplus out of its gross billing to its clients less commissions. All owner-members contribute to the capital build-up of Helping Hand, and the owner-members earn interest on share capital and patronage refund out of its net surplus. Thus, as entrepreneurs, their earning potential become greater compared to those of marginalized contractual/casual employees. Moreover, Helping Hand allows the owner-members to avail of advances where said advances are paid by the owner-members from their share in its service surplus. At the end of the year, its net surplus is distributed in the following manner: (1) 10% is set aside for General Reserve Fund (2) 10% is set aside for Educational Training Fund (3) 10% is set aside for Land and Building Fund (4) Patronage refund (5) Interest on share capital (6) Others as may be required by law Subject to the amendment of the By-Laws of Helping Hand, "Net Surplus" is defined as surplus after deduction of direct costs, operating expenses and share in the service surplus of the owner-members; that share in the service surplus represents the share of each owner-member in the service surplus based on the quality and amount of services rendered by the owner-member to the Helping Hand as determined by its Board of Directors. DcTaEH You now would like to request for confirmation of your opinion that: (a) Payments of client companies to Helping Hand for its services are not subject to 2% contractor's tax, creditable withholding tax, income tax, and value added tax, 3% percentage tax, 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, excise tax, documentary stamp tax and annual registration fee, subject to the conditions provided under RA 6938 and RR 20-2001; (b) The advances to the owner-members of Helping Hand are not subject to withholding tax and value added tax, since these advances are not income but payables of the owner-members; and (c) The share of the owner-members in the servicec surplus of Helping Hand is not subject to creditable withholding tax and value added tax but subject to income tax. In reply, please be informed that subject to the conditions set forth in RR 20-2001, Helping Hand 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, Helping Hand 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 and regardless of the aggregate capital and net surplus ratably distributed among the members (Sec. 109 (N) of the NIRC). 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. SaITHC Your client 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, excise tax under Title VI of the Tax Code of 1997, as amended by RA 9337, and documentary stamp tax imposed under the same Tax Code, provided, however, that the other party to the taxable document/transaction who is not exempt shall be the one directly liable for the tax. However, Helping Hand is liable to pay 12% VAT 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, its interest income 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 Helping Hand 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 27 (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-member 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, RR 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 in 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. Upon amendment of the By-Laws of Helping Hand, the share of the owner-members in the service surplus of Helping Hand is regarded as 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 RR 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) RR 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 RR 2-98. CacTSI 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 VAT under Sec. 105 of the same Tax Code. Finally, Helping Hand 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 Helping Hand together with the Annual Information Return and Financial Statements in accordance with Section 8 of RR 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 Helping Hand 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 same Tax Code. (Section 9, RR 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service