House Bill No. 300 "An Act Strengthening Cooperatives, Amending for the Purpose Republic Act Numbered Sixty-Nine Hundred and Thirty-Eight, otherwise, known as the Cooperative Code of the Philippines."

March 19, 1999 BIR RULING [DA-171-99] MEMORANDUM FOR : Hon. Agapito A. Aquino Chairman, Committee on Cooperative Development FROM : Beethoven L. Rualo Commissioner of Internal Revenue SUBJECT : HOUSE BILL NO. 300 "An Act Strengthening Cooperatives, Amending for the Purpose Republic Act Numbered Sixty-Nine Hundred and Thirty-Eight, otherwise, known as the Cooperative Code of the Philippines." HOUSE BILL NO. 1096 "An Act Exempting All Cooperatives from all Taxes, Levies, Duties, Fees and other Charges Amending for the Purpose Republic Act Numbered Sixty-Nine Hundred and Thirty-Eight, otherwise known as the Cooperative Code of the Philippines." HOUSE BILL NO. 6407 "An Act Amending Articles 61 and 62 of Republic Act Numbered Sixty-Nine Hundred and Thirty-Eight (R.A. 6938), otherwise known as the Cooperative Code of the Philippines and for other Purposes." HOUSE BILL NO . 300 SEC. 3. The entire provision of Article 61 of R.A. 6938, otherwise known as the Cooperative Code of the Philippines is deleted and a new provision is inserted, to read as follows: "ARTICLE 61. Tax and Other Exemptions . All cooperatives of small producers, small service providers, and/or small consumers registered pursuant to this Code shall during their existence be exempted from all taxes, import levies, permits, fees, licenses, and other impositions of whatever name and nature whether imposed by the National Government, its agencies and instrumentalities or by the local government units : Provided, that such cooperatives are certified by the Cooperative Development Authority as cooperatives of small producers, small service providers and/or small consumers: Provided further, that in order to avail of the tax and related exemption privileges above-mentioned, cooperatives shall not be required to secure any certificate from the Bureau of Internal Revenue or from the Department of Finance : Provided, Finally, that these tax and related exemption privileges may be withdrawn for cause and after due hearing by the Cooperative Development Authority." (Emphasis supplied) SEC. 4. The entire provision of Article 62 of the same Code is hereby deleted and a new provision is inserted to read as follows: "ARTICLE 62. Cancellation of Tax Exemptions . The tax exemptions and privileges of any registered cooperative with members who are not small producers and/or consumers as defined in this Act shall, after due hearing by the Cooperative Development Authority, immediately be withdrawn. The Cooperative Development Authority shall promulgate the rules and regulations to implement this provision, including the monitoring of the members and operations of cooperatives by the Authority and the re-registration of all cooperatives, if the same is found by the Authority to be necessary." HOUSE BILL NO . 1096 SEC. 1. Article 61 of R.A. 6938, otherwise known as the Cooperative Code of the Philippines, is deleted and a new provision is inserted to read as follows: "ARTICLE 61. Tax Treatment of Cooperatives . All cooperatives registered pursuant to this Code shall during their existence be exempted from all taxes, import levies, permits, fees, licenses, and impositions of whatever name and nature whether imposed by the National Government, its agencies and instrumentalities or by the local government units : Provided, that cooperatives in order to avail of the tax and related exemption privileges above-mentioned, shall be required to secure certificate from the Bureau of Internal Revenue or from the Department of Finance: Provided, further, that these tax and related exemption privileges may be withdrawn for cause and after due hearing by the Cooperative Development Authority." (Emphasis supplied) "xxx xxx xxx" HOUSE BILL NO . 6407 SEC. 1. Tax Exemptions of Cooperatives . Articles 61 of Republic Act No. 6938, otherwise known as the Cooperative Code of the Philippines, is hereby amended to read as follows: "ARTICLE 61. Tax Treatment of Cooperatives . Cooperatives that are duly registered in accordance with the provisions of this Code shall be entitled to the following tax and other exemptions:. (1) Cooperatives which transact exclusively with members, whether regular or associate, regardless of the amount of their accumulated reserves and undivided net savings, and cooperatives which transact with members, whether regular or associate, as well as with non-members and the general public, with accumulated reserves and undivided net savings of not more than Fifteen Million Pesos (P15,000,000.00), shall be exempt from the payment of: (A) All kinds of national, internal revenue taxes and all other taxes, fees and charges imposed by the National Government, of whatever kind and nature, including, but not limited to, withholding taxes on all forms of passive incomes and capital gains realized from the sale or exchange of any property of the cooperative, whether or not such incomes or gains are directly related to any cooperative economic activity ; (B) . . . (C) Customs duties, value-added tax and other taxes, charges and fees on importation of machineries, equipments, spare parts and raw materials which are not manufactured or produced locally as certified by the Department of Trade and Industry and which are directly used in their cooperative activities, machineries, spare parts, and raw materials imported tax and duty free as provided herein shall not be transferred by the cooperative to any other person or entity until after the lapse of a period of five (5) years from the date of release by the Bureau of customs of the imported items. Otherwise, the cooperative and its transferee or assignee shall be liable to pay twice the amount of the tax and or duties thereon; and (D) All other taxes, fees and charges, of whatever kind or nature, imposed by any other agency or instrumentality of the government. The two classes of cooperatives stated under paragraph (1) of this Article shall continue to be entitled to the tax and other exemptions under paragraphs (1)(A) to (1)(D) of this Article as long as they transact exclusively with members, regardless of the amount of their accumulated reserves and undivided net savings, or as long as they continue to maintain accumulated reserves and undivided net savings of not more than Fifteen Million Pesos (P15,000,000.00) even if they transact with non-members or the general public. (2) Cooperatives with accumulated reserves and undivided net savings of more than Fifteen Million Pesos (P15,000,000.00) and which transact with members as well as non-members, shall only be exempt from the payment of income taxes imposed by the National Government for a period of ten (10) years commencing from its date of registration with the Authority. Such cooperatives shall be liable to pay all other national or local taxes, customs duties, fees and charges. Provided, that the liability for taxes of a cooperative falling under this paragraph shall be limited only to income arising from its transactions with non-members or the general public. Its income and transactions with members shall be entitled to the tax and other exemptions under paragraphs (1)(A) to (1)(D) of this Article. Provided, further, that, upon the expiration of the ten (10) year period herein, a cooperative falling under this paragraph shall be subject to income tax on its transactions with non-members or the general public imposed by the national government in the same manner as corporations as provided for under the Tax Reform Act of 1997. (3) Notwithstanding the provisions of the foregoing paragraphs, cooperatives shall be liable to pay the corresponding value-added taxes upon the effectivity of R.A. No. 7716, otherwise known as the Expanded Value-Added Tax Law, unless they qualify under the exemptions provided under Republic Act No. 8241, importation by cooperatives falling under paragraph (1)(C) of this Article shall however be exempt from the value-added tax. (4) The authority, upon its approval of the registration of a cooperative, shall issue a certification indicating the nature and extent of the tax exemption of the cooperative based on the provisions of this Article. This certification, which shall be issued in lieu of the tax exemption certificate issued by the Bureau of Internal Revenue, shall serve as evidence of the nature and extent of the tax exemption status of the cooperative and shall be recognized by all other agencies of the government, as well as private entities, in their transactions with the cooperative . The certification shall be renewed on an annual basis upon approval by the authority to determine any change in the tax exemption status of the cooperative. (5) Donations made by any person or entity in favor of any cooperative, regardless of its classification, shall be exempt from any and all taxes, fees, charges imposed by the national or local government, including but not limited to donors taxes, transfer taxes, and, if the item to be donated is imported, customs duties and other taxes, fees or charges incident to the importation. Such donations shall likewise be fully deductible from the gross incomes of the donors. (6) Notwithstanding the provisions of the foregoing paragraphs, any cooperative which is otherwise entitled to any of the exemptions under this Article, but declares interest on its members' share capital in an amount which exceeds the normal rate of return on investments shall be disqualified from being entitled to such exemptions, for the taxable year in which such interest was declared. (7) Nothing in this Article shall preclude the examination of the books of accounts and other accounting records of the cooperatives by duly authorized national internal revenue and local government officers for internal revenue tax or local tax purposes, provided that previous authorization is obtained from the Authority. (Emphasis supplied) xxx xxx xxx" COMMENTS : HOUSE BILL NO . 300 This proposed bill seeks to provide for an indefinite exemption to cooperatives of small producers, small service providers and/or small consumers. The proposal to exempt them from taxes, whether national or local, during their existence is unconscionable, considering that taxes are the lifeblood of the nation (CIR vs. Pineda No. L-22734, Sept. 15, 1967 21 SCRA 105) Their primary purpose is to generate funds for the State to finance the needs of the citizens and to advance the common weal. (NPC vs. The Province of Albay, et. Al. G.R. No. 87499, June 4, 1990) Moreover, the proposal that cooperatives shall not be required to secure exemption certificate from the Bureau of Internal Revenue or from the Department of Finance is an encroachment of the power and duties of the BIR which is the agency principally tasked with the enforcement of internal revenue laws and other tax laws. In view of the foregoing, this Office does not recommend the passage of this bill. HOUSE BILL NO . 1096 The proposed bill does not prescribe the conditions for the grant of exemption and the duration of the tax exemption privileges. In short, the proposed exemption is too broad and without any limitations, hence, we do not endorse this particular portion of the bill. HOUSE BILL NO . 6407 A thorough study should be conducted particularly on the exemption granted to cooperatives which transact with members regardless of the amount of their accumulated reserves and undivided net savings and cooperatives which transact with members as well as with non-members and the general public, with accumulated reserves and undivided net savings of not more than P15,000,000.00 on their income and gains which are not directly related to their economic activity. This might give cooperatives the reason to divert their economic activity to some other field and in the process lose the purpose for which they were created, anyway their income/gains even from unrelated activities are also exempt from taxes. Moreover, the proposed bill which does not prescribe the duration of the tax exemption privilege is unfair to other taxpayers which are required to shoulder the burden of taxation. Furthermore, exempting them from the payment of taxes on their passive income and gains not related to their economic activity indefinitely would create a negative collection on the part of the BIR at this time when the BIR is doing everything possible in its collection effort to meet its collection target. LibLex (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue (Legal and Enforcement Group)