BIR Ruling [DA-183-02]

October 10, 2002 BIR RULING [DA-183-02] R.A. 6938 Castro Cadiz & Carag Law Offices Suite 2602, 26th Floor, The Atlanta Centre No. 31 Annapolis Street, Greenhills 1500 San Juan, Metro Manila Attention: Attys. Othelo C. Carag, Anna Liza M. Ang-Co and Marie Christine E. Avaricio Gentlemen : This refers to your letter dated August 7, 2002 requesting in behalf of your client, Asiapro Multi-Purpose Cooperative (Asiapro), for the exemption of Asiapro from payment of internal revenue taxes under Articles 61 and 62 of Republic Act 6938 and Revenue Regulations 20-2001 dated November 12, 2001. HDTISa It is represented that Asiapro is a multi-purpose cooperative duly registered with the Cooperative Development Authority on November 23, 1999 with Registration Certificate No. 0-623-2460; that its vision is to be the service provider of choice, under a cooperative system, that aims to continuously improve the quality of life of its owner-members; that Asiapro focuses its efforts and unique and innovative approaches on job contracting and manpower services; that Asiapro offers manpower service solutions that provide customers the opportunity to achieve higher productivity, work flexibility and operational cost effectiveness; that accordingly, it takes on a two-fold mission: a) to provide its owner-members with sustainable, progressive, diversified and dignified source of livelihood opportunities in the spirit of productivity, cooperation and entrepreneurship, and b) to provide clients with consistently productive, quality driven and desirable services; that under its Articles of Cooperation, Asiapro has the following primary purposes: (1) To provide savings and credit facilities to its owner-members, and develop other livelihood services for the owner-members; and (2) To engage in service contracting, management services, productivity and manpower resource services, in activities such as but not limited to, production, manufacturing, agriculture, office administration, sales and promotions, logistics, housekeeping and maintenance. It is also represented that Asiapro is comprised of workers and professionals with work experience and aptitude in diversified service functions and industrial operations; that the service personnel assigned to client companies nationwide are packers, production workers, warehouse helpers, office machine operators, drivers, merchandisers and the like; that Asiapro deals with both owner-members and non-members; that the service personnel assigned to client-companies are all co-owners of Asiapro; that Asiapro's members are no longer worker-employees; that instead of traditional employment, they are now entrepreneurs contributing their services to Asiapro toward mutually beneficial business opportunities and partnerships with clients; that the owner-members of Asiapro receive numerous benefits; that they periodically receive their corresponding share in the service surplus of Asiapro; that Asiapro derives its service surplus out of its gross billing to its clients less commissions; that all owner-members contribute to the capital build-up of Asiapro, and the owner-members earn interest on share capital and patronage refund out of Asiapro's net surplus; that thus, as entrepreneurs, their earning potential become greater compared to those of marginalized contractual/casual employees; that moreover, Asiapro allows the owner-members to avail of advances from Asiapro; that said advances are paid by the owner-members from their share in the service surplus of Asiapro; that at the end of the year, Asiapro's 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 that subject to the amendment of the By-Laws of Asiapro; 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 Asiapro as determined by the Board of Directors of Asiapro. You are now requesting for an opinion that: "a) Payments of client companies to Asiapro for services rendered by Asiapro are not subject to 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 Republic Act No. 6938 and Revenue Regulations 20-2001 dated November 12, 2001; "b) The advances to the owner-members of Asiapro 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 service surplus of Asiapro 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 Revenue Regulations 20-2001, Asiapro is exempt from ordinary income tax on your transactions with both owner-members and non-members provided that your 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, Asiapro 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 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. 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, and 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. EHaDIC However, Asiapro is liable to pay the 10% VAT billed to you 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, your 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 Asiapro derive 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-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. However, upon amendment of the By-Laws of Asiapro, the share of the owner-members in the service surplus of Asiapro 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, Asiapro 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 Asiapro together with the Annual Information Return and Financial Statements in accordance with Section 8 of Revenue Regulations 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 Asiapro 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, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service