BIR Ruling [DA-215-98]

June 3, 1998 BIR RULING [DA-215-98] MEMORANDUM FOR : Commissioner Liwayway Vinzons-Chato FROM : Deputy Commissioner Sixto S. Esquivias IV SUBJECT : Exemption of Eclectic Multi-Purpose Cooperative from the payment of advance VAT on refined sugar milled at Victorias Milling Company, Inc. This refers to the letter dated April 23, 1998 of Mr. Michael K. Suarez, Administrator of the Sugar Regulatory Administration, in relation to the letter dated April 22, 1998 of Victorias Milling Company, Inc. requesting for a ruling regarding the exemption of Eclectic Multi-Purpose Cooperative (Eclectic, for brevity), with office address at Talisay Public Market, Talisay, Negros Occidental, from the payment of advance VAT on refined sugar milled at Victorias Milling Company, Inc. LibLex Records show that on March 6, 1998, Eclectic filed a request for a certificate of tax exemption as a multi-purpose cooperative duly registered with the Cooperative Development Authority (CDA) transacting business with both members and non-members. On the basis of documents submitted, this Office issued BIR Ruling No. ECCP-10-98 dated March 13, 1998 exempting Eclectic from all taxes pursuant to Article 62 of R.A. No. 6938 and from VAT on its gross receipt pursuant to Section 109(u) of the Tax Code of 1997 and from the 3% tax imposed under Section 116 of the same Code. On the basis of said certificate of tax exemption, Eclectic allegedly started buying raw sugar from sugar traders and had it refined at Victorias Milling Company, Inc. and thereafter demanded the release of the refined sugar without prepayment of the VAT as required under Revenue Regulations No. 7-89. However, VMC Farmers Cooperative, represented by Mr. Jose V. Ramos, objected to the grant of authority for the release of the refined sugar without the payment of VAT for the following reasons: 1. Under Section 109(u) of the Tax Code of 1997, only sales by agricultural cooperatives to their members as well as the sale of their produce, whether in its original state or processed form, is exempt from VAT. Ergo, Eclectic which is a non-agricultural cooperative whose line of business is general merchandising and which merely buys raw sugar from sugar traders who are non-members, is not exempt from VAT; and 2. Allowing Eclectic to release the refined sugar without prepayment of VAT will result in the loss of approximately P1.38 million in taxes (30,000/kg. P46.) The issue, therefore, is whether or not the grant of exemption to Eclectic includes exemption from VAT on the raw sugar purchased from non-members, refining the same at Victorias Milling Company and selling the processed sugar in the market. cdta It is respectfully submitted that Eclectic is exempt from VAT on the sale of goods, i.e., refined sugar, pursuant to Section 109 (u) of the Tax Code of 1997 which provides "(u) Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with the Cooperative Development Authority: Provided, That the share capital contribution of each member does not exceed Fifteen Thousand Pesos (P15,000) and regardless of the aggregate capital and net surplus ratably distributed among the members." Being a non-agricultural cooperative duly registered with the CDA whose capital contribution of each member does not exceed P15,000.00 as shown by its Articles of Cooperation, Eclectic can avail of this exemption privilege granted by law. In view however, of the allegation that Eclectic is being used by sugar traders, notably by Philippine Agro Corporation, as a subterfuge to evade payment of taxes, we are inclined to recommend that an immediate investigation be conducted to ascertain the following: 1. financial capacity of Eclectic if it is really capable of financing the purchase or raw sugar from sugar traders; 2. quantity of raw sugar sold individually by the sugar traders to Eclectic, showing the amounts, dates of sale and the receipts therefor; 3. whether or not there is really a sale or transfer of ownership of the raw sugar from the sugar traders to Eclectic; 4. whether or not the resulting refined sugar is quedanned in the name of Eclectic; and prcd 5. whether or not the share capital contribution of each member of Eclectic does not exceeds P15,000.00. Upon receipt of the report of investigation, this office will decide whether or not to revoke the certificate of exemption (ECCP-10-98) issued to Eclectic Multi-Purpose Cooperative on March 13, 1998. llcd Respectfully Submitted, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)