Philippine Army Finance Center Producers Integrated Cooperative

December 24, 2008 BIR RULING [DA-(C-186) 578-08] RR 2-98; DA-012-2007 Philippine Army Finance Center Producers Integrated Cooperative PAFCPIC Bldg., Bayani Road, Fort Bonifacio, Taguig Metro Manila Attention: Col. Efren R. Zaide (Ret.) President Gentlemen : This refers to your letter dated May 8, 2007, requesting for a clarification on whether or not you should withhold taxes from your members with regard to the interest on share capital. DSATCI It appears that the Philippine Army Finance Center Producers Integrated Cooperative (PAFCPIC) is a multipurpose cooperative dealing with members only; that PAFCPIC was previously issued BIR Ruling No. DA-012-2007 dated January 11, 2007; that the said Ruling clearly states the exemption of PAFCPIC from the payment of income tax on income from operations, value-added tax, 3% percentage tax, donor's tax, excise tax, documentary stamp tax and such other taxes as provided for in Section 3.1 of Revenue Regulations No. 20-2001 dated November 12, 2001; that it also stated that the cooperative shall be constituted as a withholding agent if it acts as an employer and its employees receive compensation income subject to withholding tax provided for in Section 57 of the Tax Code of 1997, as amended; that as an employer, PAFCPIC withholds taxes from the income of its employees; that cooperative members shall be taxed equivalent to ten percent (10%) on the interest on share capital; and that you would like to be clarified as to whether or not PAFCPIC is required to withhold tax from its members since interest on share capital is not in the nature of compensation nor does it fall under income payments subject to withholding tax under Revenue Regulations No. 2-98. In reply, please be informed that Revenue Regulations No. 20-2001 was promulgated to (i) implement the provisions of Articles 61 and 62 of R.A. No. 6938, as effectively amended by R.A. Nos. 7716, 8241 and 8424 granting tax exemptions to cooperatives, and (ii) to prescribe the guidelines for the availment thereof, thereby cooperatives were already in existence. Capital contribution refers to the assets which a member puts into the cooperative as part of his investment in the company. One's membership to the cooperative is therefore dependent on the members' capital subscription or contribution to the cooperative. In Citibank, N.A. vs. Court of Appeals and Commissioner of Internal Revenue, the Supreme Court gave us three reasons for the withholding tax system: (1) to provide the taxpayer a convenient manner to meet his probable income tax liability; (2) to ensure the collection of the income tax which could otherwise be lost or substantially reduced through failure to file the corresponding returns; and (3) to improve to government's cash flow. Clearly from the foregoing, the cooperative is merely an agent acting for the government to ensure collection of taxes. Its liability to withhold and remit taxes is personal and direct; and it shall be made to answer for its failure to comply with the withholding tax provisions of the Tax Code, which was to deduct and withhold from the payees and to remit to the government the withholding taxes due. Being tax-exempt is not a valid ground for its refusal to withhold and remit the taxes due. Cooperatives are reminded that the codal provisions on the withholding tax are mandatory and must be complied with by the withholding agent. IESAac In BIR Ruling No. DA-012-2007 dated January 11, 2007, this Office ruled that in case cooperatives 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. You opine that the interest on the share capital is not in the nature of compensation nor does it fall under income payments subject to withholding tax under Revenue Regulations No. 2-98. We disagree. While BIR Ruling No. DA-012-2007 did not state that interest on share capital is subject to withholding tax nor was it stated that PAFCPIC is constituted as withholding agent on its payments of such interest to its members, the cooperative's (PAFCPIC) interest income is nonetheless subject to final tax. As a matter of policy, final tax on passive income (such as interests, royalties, prizes, etc.) is being withheld upfront. Otherwise, stated, the payor shall withhold the final tax on such interest payments. The owner-member should however declare the interest received in his income tax returns and pay the corresponding tax thereon. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service