Carag De Mesa & Zaballero Law Offices

July 13, 2007 BIR RULING [DA-381-07] 62 RA 6938 Carag De Mesa & Zaballero Law Offices Suite 2602, 26th Floor, The Atlanta Centre No. 31 Annapolis Street, Greenhills 1500 San Juan, Metro Manila Attention: Attys. Othelo C. Carag Priscilla F. Zaballero Gladys G. Bravo Gentlemen : This refers to your letter dated June 26, 2007 requesting for confirmation of your opinion on the tax consequences of the transactions of Asiapro Multi-Purpose Cooperative ("Asiapro") and its owner-members relating to its main/principal objectives under its Articles of Cooperation. It is represented that Asiapro is a multi-purpose cooperative duly registered with the Cooperative Development Authority ("CDA") on 23 November 1999 under registration Certificate No. 0-623-2460. It provides services under a cooperative system to its clients to afford them the opportunity to achieve higher productivity, work flexibility and operational cost effectiveness; and that Asiapro takes on a two-fold mission: 1) to provide its owner-members with sustainable, progressive, diversified and dignified source of livelihood opportunities in a spirit of productivity, cooperation and entrepreneurship; and 2) to provide its client-companies with consistently productive, quality-driven and desirable services. It is further represented that Asiapro is composed of regular and associate members who are workers and professionals with work experience and aptitude in diversified service functions and industrial operations; that its owner-members contribute to the capital build-up of Asiapro and are deployed to client-companies; that they are no longer worker-employees but are now entrepreneurs contributing their services to Asiapro to achieve mutually satisfactory business opportunities and partnerships with client-companies; that as owner-members, they earn interest on their share capital and patronage refund out of Asiapro's net surplus; that as entrepreneurs, they periodically receive their corresponding share in the service surplus of Asiapro. Consequently, their earning potential becomes greater compared to the marginalized contractual/casual employees. HSIaAT On 10 October 2002, Asiapro secured BIR Ruling DA-183-02 confirming that it is exempt from ordinary income tax and consequently, from creditable withholding 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), based on Article 62 of Republic Act No. 6938, otherwise known as the Cooperative Code of the Philippines (the "Cooperative Code"). The said BIR Ruling likewise confirmed, among others, that Asiapro 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 (P15,000.00), pursuant to Section 109 (u) of the National Internal Revenue Code, as amended (the "Tax Code"). It is also represented that Asiapro's accumulated reserves and undivided net savings may soon exceed Ten Million Pesos (P10,000,000.00). You are now requesting for an opinion that: 1. The sale of services by Asiapro to its client-companies is exempt from the twelve percent (12%) value added tax ("VAT") under Section 109 (n) of the National Internal Revenue Code of 1997, as amended, ("Tax Code") provided that the share capital contribution of each of its owner-members at any given time does not exceed Fifteen Thousand Pesos (P15,000.00) regardless of the aggregate capital and net surplus ratably distributed among its owner-members. 2. In the event that the accumulated reserves and undivided net savings of Asiapro exceed Ten Million Pesos (P10,000,000.00), Asiapro shall be: a. Exempt from income tax and consequently, from creditable withholding tax within ten years from the date of its registration or until 23 November 2009, provided that at least twenty-five percent (25%) of its net income is returned to the members in the form of interest and/or patronage refund pursuant to Section 3.2 (II) (a) of Rev. Reg. 20-01; b. Exempt from income tax on its undivided net savings, patronage refund and allocations for statutory fund reserves but subject to thirty percent (30%) income tax on the amount allocated for interests on capital after 23 November 2009 (i.e. the lapse of the ten-year period from the date of its registration with the CDA), provided that no income tax shall be imposed on the interest on capital individually received by its members under Section 3.2 (II) (a) of Rev. Reg. 20-01; aACHDS c. Exempt from creditable withholding tax even after the lapse of the ten-year period from the date of its registration since income payment to cooperatives with accumulated reserves and undivided net savings in excess of Ten Million Pesos (P10,000,000.00) is not among the income payments subject to creditable withholding tax under Section 2.57.2 of Revenue Regulations No. 2-98, as amended, ("Rev. Reg. 2-98") pursuant to BIR Ruling [DA-183-02] dated 10 October 2002; d. Exempt from three percent (3%) percentage tax and annual registration of fee of Five Hundred Pesos (P500.00) after 23 November 2009 pursuant to Section 3.2 (II) (b) of Rev. Reg. 20-01; e. Subject to all other revenue taxes unless otherwise provided by law under Section 3.2 (II) (c) of Rev. Reg. 20-01; and f. Entitled to limited or full deductibility from the gross income of amount donated to duly accredited charitable, research and educational institutions and reinvestment to socio-economic projects within the area of operation of the cooperative pursuant to Section 3.2 (II) (d) of Rev. Reg. 20-01. 3. If the accumulated reserves and undivided net savings of Asiapro exceed Ten Million Pesos (P10,000,000.00), the owner-members of Asiapro shall: a. Until 23 November 2009, be subject to income tax on their share in the service surplus, interest on capital, and patronage refund under Section 5 of Rev. Reg. 20-01, but exempt from creditable withholding tax; b. After 23 November 2009, be subject to income tax on their share in the service surplus and patronage refund but exempt from creditable withholding tax and income tax on the interest on capital individually received by them pursuant to Section 5 of Rev. Reg. 20-01. In reply, please be informed that the sale of services by Asiapro to its client-companies is exempt from the twelve percent (12%) VAT provided that the share capital contribution of each of its members at any given time does not exceed Fifteen Thousand Pesos (P15,000.00) regardless of the aggregate capital and net surplus ratably distributed among its members. Otherwise, the sale of services by Asiapro shall be subject to twelve (12%) VAT. Section 109 (N) of the Tax Code provides as follows: "SEC. 109. Exempt Transactions . (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax: xxx xxx xxx (N) 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 ;" (Emphasis supplied.) Clearly, from the foregoing provision of the Tax Code, the sale of services by Asiapro to its client-companies is exempt from the twelve percent (12%) VAT provided that the share capital actually contributed and paid to Asiapro by each of its owner-members at any given time does not exceed Fifteen Thousand Pesos (P15,000.00) regardless of the amount of the aggregate capital and net surplus ratably distributed among its owner-members by Asiapro. However, if at any given time the share capital actually contributed and paid by one of its owner-members exceed Fifteen Thousand Pesos (P15,000.00), Asiapro shall be subject to the twelve percent (12%) VAT on its sale of services to the client-companies. AaSCTD Moreover, Section 3.2 of Rev. Reg. 20-01 exempts from VAT a duly registered cooperative under Section 109 pars. (r), (s), (t) and (u) that is dealing/transacting business with both members and non-members in the pursuit of its primary objectives regardless of the amount of its accumulated reserves and undivided net savings, to wit: "3.2 Taxability/Exemption of duly registered cooperatives dealing/ transacting business with both members and non-members: I. For cooperatives with accumulated reserves and undivided net savings of not more than Ten Million Pesos (P10,000,000.00) a. Exemption from all internal revenue taxes for which they are directly liable , as enumerated under Sec. 3.1 of these Regulations. II. For cooperatives with accumulated reserves and undivided net savings of more than Ten Million Pesos (P10,000,000.00) xxx xxx xxx b. Exemption from VAT under Section 109 (r), (s), (t) and (u) , 3% percentage tax under Section 116, and the P500.00 annual registration fee imposed under Section 236 (B), all of the Tax Code of 1997; xxx xxx xxx" (Emphasis supplied.) Section 3.1 of Rev. Reg. 20-01 referred to in Section 3.2 (I) (a) of Rev. Reg. 20-01 above exempts from VAT duly registered cooperatives dealing/transacting business with members only under Section 109 pars. (r), (s), (t), and (u) of the National Internal Revenue Code of 1997 ("NIRC"). Section 109 pars. (r), (t) and (u) of the NIRC, was however, amended by RA 9337 and now appear as Section 109 pars. (L), (M) and (N) of the Tax Code. In the event that the accumulated reserves and undivided net savings of Asiapro exceed Ten Million Pesos (P10,000,000.00), we confirm your opinion that Asiapro shall be exempt from income tax within ten years from the date of its registration on 23 November 1999 or until 23 November 2009 provided that at least twenty percent (25%) * of its net income is returned to its members in the form of interest and/or patronage refund under Section 3.2. (II) (a) of Rev. Reg. 20-01. Since it is exempt from income tax, Asiapro is likewise exempt from creditable withholding tax pursuant to Section 2.57.5 (B) of Rev. Reg. 2-98. After the lapse of the ten-year period from the date of registration or after 23 November 2009, the accumulated reserves and undivided net savings of Asiapro exceed Ten Million Pesos (P10,000,000.00) Asiapro shall be exempt from income tax on its undivided net savings and allocations for statutory fund reserves but it shall be subject to thirty percent (30%) income tax on the amount allocated for interests on capital provided that no income tax shall be imposed on the interest on capital individually received by its members. ISDHEa Section 3.2 (II) (a) of Rev. Reg. 20-01 expressly provides that if the accumulated reserves and undivided net savings of a duly registered cooperative dealing/transacting business with both members and non-members exceed Ten Million Pesos (P10,000,000.00), it shall be liable to income tax on the amount allocated for interests on capital after the lapse of the ten-year period from the date of its registration, to wit: "3.2 Taxability/Exemption of duly registered cooperatives dealing/ transacting business with both members and non-members: xxx xxx xxx II. For cooperatives with accumulated reserves and undivided net savings of more than Ten Million Pesos (P10,000,000.00) a. Exemption from income tax for a period of ten (10) years from the date of registration with the CDA, provided, that at least twenty-five percent (25%) of the net income of the cooperative is returned to the members in the form of interest and/or patronage refund. For cooperatives whose exemptions were removed by Executive Order No. 93, the ten-year period shall be reckoned from March 10, 1987 (meaning, tax exemption is valid only until March 10, 1997). After the lapse of the above ten-year period, they shall be subject to income tax at the full rate on the amount allocated for interests on capital, provided that the same is not consequently imposed on interest individually received by members"; (Emphasis supplied.) From the foregoing, it is clear that if the accumulated reserves and undivided net savings of Asiapro exceed Ten Million Pesos (P10,000,000.00), Asiapro shall be subject to income tax only on the amount allocated for interests on capital at the rate of thirty percent (30%) beginning 24 November 2009 or after the lapse of the ten-year period from the date of registration. On the other hand, the amount corresponding to the undivided net savings and allocations of the net surplus for statutory fund reserves such as the general reserve fund, education and training fund, and optional fund are still exempt from the thirty percent (30%) income tax after 23 November 2009. Asiapro shall likewise be exempt from creditable withholding tax considering that income payments to cooperatives with accumulated reserves and undivided net savings in excess of Ten Million Pesos (P10,000,000.00) are not among the income payments subject to creditable withholding tax under Section 2.57.2 of Rev. Reg. 2-98 pursuant to BIR Ruling No. DA-183-02 dated 10 October 2002. DcHSEa Asiapro cannot be considered as a business agency subject to two percent (2%) creditable withholding tax under Section 2.57.2 (E) (4) (g) of Rev. Reg. 2-98 because a cooperative is by its nature different from an ordinary business concern, being run by persons, partnerships or corporations. In the case of Cooperative Rural Bank of Davao City, Inc. v. Pura Ferrer-Calleja , 165 SCRA 725 (1988), the Supreme Court made a distinction between a cooperative and an ordinary business concern, to wit: " A cooperative, therefore, is by its nature different from an ordinary business concern, being run either by persons, partnerships, or corporations . Its owners and/or members are the ones who run and operate the business while the others are its employees. As above stated, irrespective of the number of shares owned by each member they are entitled to cast one vote each in deciding upon the affairs of the cooperative. Their share capital earn limited interests. They enjoy special privileges as exemption from income tax and sales taxes, preferential right to supply their products to State agencies . . ." (Emphasis supplied.) Moreover, a cooperative with accumulated reserves and undivided net savings in excess of Ten Million Pesos (P10,000,000.00) still enjoys exemption from income tax on its undivided net savings and allocations for statutory fund reserves even after the lapse of the ten-year period from the date of its registration. Since it is still exempt from income tax on its undivided net savings and allocations for statutory fund reserves, it is likewise exempt from creditable withholding tax pursuant to Section 2.57.5 (B) of Rev. Reg. 2-98. Asiapro will also be entitled to limited or full deductibility from the gross income of the amount it donated to duly accredited charitable, research and educational institutions and reinvestment to socio-economic projects within the area of operation of the cooperatives. Asiapro will likewise be exempt from VAT under Section 109 (N) of the Tax Code even if its accumulated reserves and undivided net savings exceed Ten Million Pesos (P10,000,000.00) provided that the share capital actually contributed and paid to Asiapro by each of its owner-members at any given time does not exceed Fifteen Thousand Pesos (P15,000.00). TCIHSa We likewise confirm your opinion that if the accumulated reserves and undivided net savings of Asiapro exceed Ten Million Pesos (P10,000,000.00), the owner-members of Asiapro shall be liable to pay all the necessary internal revenue taxes under the Tax Code including the income tax on their share in the service surplus, interest on share capital and patronage refund within ten years from the date of its registration with the CDA or until 23 November 2009 pursuant to Section 5 of Rev. Reg. 20-01, to wit: "SEC. 5. Taxability of Members/Stockholders of Cooperatives . The exemption of the cooperatives does not extend to their individual members. Thus, members of cooperatives are liable to pay all the necessary internal revenue taxes under the National Internal Revenue Code, including the tax on earnings derived from their capital contribution . Provided, however, that interests received by members of a cooperative with accumulated reserves and undivided net savings greater than Ten Million Pesos (P10,000,000.00), after the lapse of the ten-year exemption under Section 3.2 (II) above, shall no longer be taxable in the hands of such members." (Emphasis supplied.) The owner-members of Asiapro are, however, exempt from creditable withholding tax on their share in the service surplus pursuant to BIR Ruling No. DA-183-02 dated 10 October 2002, which ruled as follows: "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." (Emphasis supplied.) If the accumulated reserves and undivided net savings of Asiapro exceed Ten Million Pesos (P10,000,000.00), the owner-members of Asiapro shall, after the lapse of the ten-year period from the date of its registration with the CDA or after 23 November 2009, remain exempt from creditable withholding tax on their share in the service surplus and subject to income tax on their share in the service surplus and patronage refund but are now exempt from income tax on the interest on capital received by them pursuant to Section 3.2 (II) (a) and Section 5 of Rev. Reg. 20-01. It is, however, understood that the tax exemptions mentioned herein shall remain during the period that Asiapro is in good standing as ascertained by the CDA on an annual basis. Asiapro is also 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 CDA together with its Annual Information Return and Financial Statements in accordance with Section 8 of Revenue Regulations No. 20-01. 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, then this ruling shall be considered null and void. ETDHSa Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service