BIR Ruling [DA-246-05]

June 8, 2005 BIR RULING [DA-246-05] Rev. Reg. No. 12-2003; RMC No. 3-2001; RMC No. 10-2001; RA 6938 ECCP - 21-2001 National Confederation of Cooperatives 227 J.P. Rizal Street, Project 4 1109 Quezon City, Philippines Attention: Mr. Guillermo P. Cua Chief Executive Officer Gentlemen : This refers to your letter dated July 23, 2003 requesting clarification on the following issues: 1. The procedure as to the processing of a tax exemption/ruling, including the responsible offices/persons and the indicative period for the completion of each set-up; 2. An official statement on the exemption of cooperatives from Revenue Regulations No. 12-2003. It is represented that cooperatives are experiencing problems in the delayed issuance of tax exemption despite their compliance with all the requirements; that this is compounded by the lack of response/clarification from many BIR offices about the status of the requests for certificates; that when Revenue Regulations No. 20-2001 was being drafted, the suggestion that a cooperative should be deemed exempted if after 90 days from the cooperative's application, and the BIR does not act on the application, was not included; that in at least two regional consultations, cooperatives complained that the BIR offices were requiring them to pay VAT on their interest income from loans to members; that the BIR offices cited Revenue Regulations No. 12-2003 as the basis of their action; that it is your opinion that requiring credit or multi-purpose cooperatives to pay VAT is clearly against the law (Republic Act 8241), which exempts such cooperatives; that the problem seem to be rooted in the lack of a specific provision in RR 12-2003 reiterating the exemption from VAT of cooperatives engaged in lending to their members; that some BIR officials consider cooperatives as non-bank financial intermediaries that are required by law and the said regulations to pay VAT. In reply, please be informed of the following: 1. Revenue Memorandum Circular No. 3-2001 dated January 31, 2001 provides that, in order to expedite certain actions with established precedents, all Regional Directors, including those who are in acting capacity, are given the authority to sign rulings prepared by their respective Legal Divisions. This include tax exemption of cooperatives under Republic Act No. 6938, as amended by R.A. 7716 and R.A. 8241. In addition, pursuant to Revenue Memorandum Circular No. 10-2001 dated February 25, 2001, the Assistant Commissioner, Legal Service shall have authority to sign request for rulings on topics covered by RMC No. 3-2001 falling within the jurisdiction of the National Office. All requests for rulings on topics covered by RMC No. 3-2001 falling within the jurisdiction of the regional offices received by the national office prior to the effectivity of the aforecited circular shall likewise be signed by the Assistant Commissioner, Legal Service. 2. Section 2 (2.3) of Revenue Regulations No. 2-12-2003 provides: "2.3 Non-bank Financial Intermediaries shall refer to persons or entities whose principal functions include lending, investing or placement of funds or evidences, of indebtedness or equity deposited with them, acquired by them or otherwise coursed through them, either for their own account or for the account of others. This likewise includes all other entities regularly engaged in the lending of funds or purchasing of receivables or other obligations with funds obtained from the public through the issuance, endorsement or acceptance of debt instruments of any kind for their own account, or through the issuance of certificates of assignment or similar instruments with recourse, trust certificates, or of repurchase agreements, whether any of these means of obtaining funds from the public is done on a regular basis or only occasionally ." Based on the aforementioned revenue regulations, this Office is of the opinion that a cooperative shall be considered as a non-bank financial intermediary only if it is engaged in lending activities with both its members and non-members. Under Section 109 paragraphs (t) and (u) of the Tax Code of 1997, a multi-purpose cooperative which is duly registered with the CDA and dealing with members only is exempt from VAT on the following: 1. Gross receipts from lending activities whose lending operation is limited to their members ; and 2. Sale of items, provided, that the share capital contribution of each member does not exceed Fifteen Thousand Pesos (P15,000.00) and regardless of the aggregate capital and net surplus ratably distributed among the members. Accordingly, Revenue Regulations No. 12-2003 will not apply if the cooperative's lending activities are limited to its members, and in the case of sale of items, the share capital contribution of each member does not exceed Fifteen Thousand Pesos (P15,000.00) regardless of the aggregate capital and net surplus ratably distributed among the members. Such cooperative will not be considered as a non-bank financial intermediary and therefore exempt from the Value-Added Tax. EScAHT Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service