Negros Del Norte Planters' Association Multi Purpose Cooperative (NDNPAMPC)

January 11, 2008 BIR RULING [ECCP-001-08] 109; R.A. 6938; RR 20-2001; ECCP-002-2003; ECCP-006-2006; ECCP-043-2007 Negros Del Norte Planters' Association Multi Purpose Cooperative (NDNPAMPC) Vicmico Compound, Victorias City, Negros Occidental Attention: Armin A. Evangelista Manager Gentlemen : This refers to your letter dated January 4, 2008 requesting for confirmation of your opinion that the sale of sugar produce made by Negros Del Norte Planters' Association Multi Purpose Cooperative ("NDNPAMPC" for brevity) is exempt from the payment of VAT pursuant to Section 109 (L) of Republic Act No. 9337. cEITCA The Negros Del Norte Planters' Association Multi Purpose Cooperative (NDNPAMPC) was issued by the Cooperative Development Authority with a Certificate of Registration covered by Registration No. ILO-3468 on 16 August 1999. Up to the present, NDNPAMPC remains a cooperative of good standing as evidenced by the issuance of Certificate of Good Standing dated 19 November 2007 covered by CGS No. ILO-07-161. NDNPAMPC was formed after several sugarcane farmers from the northern portion of Negros Occidental voluntarily agreed to pool their resources to form a cooperative with the sole purpose of undertaking an economic enterprise to meet their common needs, particularly by supplying the production inputs and/or any commodity needed by them and to exclusively market the produce of its members. Consequently, NDNPAMPC has been issued by the Sugar Regulatory Administration with the Certificates of Registration as a Sugar Trader and as a Molasses Trader on 22 August 2007. The photocopy of its Certificate of Registration No. ILO-3468, Articles of Cooperative, By-Laws, Certificate of Good Standing and Certificates of Registration as a Sugar Trader and Molasses Trader issued by the Sugar Regulatory Administration. Being a multi-purpose cooperative, NDNPAMPC is an agricultural co-producer of the sugarcane produced by its cooperative members. Since NDNPAMPC is an artificial person, it is physically impossible to do the actual tillage of the land. Hence, the cooperative and its members jointly carry out the sugar farming activities during the agricultural crop year. The cooperative members have consistently provided the sugar farms/plantations and the tillage while NDNPAMPC has provided the following services, in its capacity as co-producer, to wit: 1. releases fertilizer subsidy to its members; 2. provides other production inputs to increase the sugarcane production of its members; 3. maintains transloading services sugarcane produce to the millsite; 4. releases cash advances or loans to its members during the production and milling stages to protect its members against imposition of usurious interests; TIaCcD 5. provides educational training seminar for production improvement and development; 6. facilitates technology transfer affecting sugar production and/or intercropping production; and 7. acts as the exclusive marketing arm of the sugar produced from the various farms of its cooperative members. Without doubt, the existence of the raw sugar, the primary product of the sugarcane farms produced by the cooperative members, was made possible through the joint efforts of the Cooperative and its members in their capacity as co-producers. With the co-production arrangement of the members with the cooperative, it allows the members to attain increased productivity and income through the promotion of equitable distribution of net surplus through maximum utilization of economies of scale, cost sharing and risk sharing. Therefore, NDNPAMPC are but one in "COOPERATIVE SPIRIT". As the exclusive marketing arm of the harvested sugarcane from the various farms of its members, NDNPAMPC has acted as the exclusive marketing arm of its members. It does not engage in the purchase of sugarcane produced by non-members. As such, the sugarcane produced by the cooperative members will be harvested, hauled, delivered and milled to the sugarmill, particularly Victorias Milling Company, in the name of NDNPAMPC. The sugarmill issues the quedan of the raw sugar produced in the name of NDNPAMPC by virtue of the membership agreement that the cooperative will be solely and exclusively tasked to market the sugar, molasses and other derivative products and thereafter, NDNPAMPC turns over to its members the net proceeds of the sale of the sugarcane produce. In instances where NDNPAMPC decides to further process the produced raw sugar of its members into refined sugar, the sugarmill issues refined sugar, quedan in the name of NDNPAMPC. DTIcSH When NDNPAMPC acted as the exclusive marketing arm of the sugarcane produced by its members, the cooperative is likewise assured of collecting the various loans and/or cash advances it released to its cooperative members by deducting all advances before liquidating or paying the amount due to its members. At present, NDNPAMPC is holding a tax exemption pursuant to BIR Ruling No. ECCP-007-99/ECCP-032-99 dated 7 October 1999 pursuant to Republic Act No. 6938 and the pertinent provisions of the Tax Code of 1997, as implemented by BIR Revenue Regulation No. 20-2001. In reply, please be informed that Section 109 (L) of Republic Act (R.A.) No. 9337, as implemented by Revenue Regulations (RR) No. 4-2007 provides, to wit: "SEC. 7. Section 109 of the same Code, as amended, is hereby further amended to read 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 (L) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to their members as well as sale of their produce, whether in its original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce;" Section 14 of RR 4-2007, in turn provides, viz. : "Section 14. VAT-Exempt Transactions. Sec. 4.109-1(B)(1) * of RR No. 16-2005 is hereby amended to read as follows: "SEC. 4.1.09-1. VAT-Exempt Transactions. . . . . (B) Exempt transactions. Subject to the provisions of Sec. 4.109-2 hereof, the following transactions shall be exempt from VAT: xxx xxx xxx. (l) Sales by agricultural cooperatives duly registered and in good standing with the Cooperative Development Authority (CDA) to their members, as well as sale of their produce, whether in its original state or processed form, to non-members, their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce. Sale by agricultural cooperatives to non-members can only be exempted from VAT if the producer of the agricultural products sold is the cooperative itself. If the cooperative is not the producer ( e.g. , trader), then only those sales to its members shall be exempted from VAT; It is to be reiterated however, that sale or importation of agricultural food products in their original state is exempt from VAT irrespective of the seller and buyer thereof, pursuant to Subsection (a) hereof." From the foregoing provisions of R.A. No. 9337, as implemented by RR 4-2007, it is clear that the sale by agricultural cooperatives of their agricultural products to their members and non-members is exempt from VAT. However, with regard to the sale of their products to non-members, it will only be exempt from VAT if the cooperative itself is the producer of said product and not acting as a mere trader or broker. A cooperative is a duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve a lawful common social or economic end, making equitable contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking in accordance with universally accepted cooperative principles. (Section 3, R.A. No. 6938) ASHaTc The farmer-members of NDNPAMPC joined together to form the NDNPAMPC with the objective of producing and selling of sugar as its products. The members thereof made their respective equitable contributions required to achieve their objectives. Consequently, the proceeds of the sale thereof are intended to be shared among them in accordance with cooperative principles. Thus, NDNPAMPC and its members' respective roles in the operation of the cooperative cannot be treated as separate and distinct from each other. Notwithstanding that NDNPAMPC is not the owner of the land and the actual tiller of the land, it is considered as the actual producer of the members' sugarcane production because it primarily provided the various productions inputs (fertilizers), capital, technology transfer and farm management. In short, NDNPAMPC has direct participation in the sugarcane production of its farmers-members. Accordingly, this Office hereby confirms your opinion that the sale of sugar produce made by NDNPAMPC to its members as well as to non-members is exempt from the payment of VAT, pursuant to Section 109 (L) of Republic Act No. 9337, as implemented by RR 4-2007. AaEcDS This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service