Negros Consolidated Farmers Multi-Purpose Cooperative (COFA)

January 11, 2008 BIR RULING [ECCP-002-08] 109; R.A. 6938; RR 20-2001; ECCP-002-2003; ECCP-006-2006; ECCP-043-2007 Negros Consolidated Farmers Multi-Purpose Cooperative (COFA) 6th Floor, PNB Bldg., Lacson Street Bacolod City Attention: Vicente Lovina Chairman of the Board Gentlemen : This refers to your letter dated January 5, 2008 requesting for confirmation of your opinion that the sale of sugar produce made by Negros Consolidated Farmers Multi-Purpose Cooperative ("COFA" for brevity) is exempt from the payment of VAT pursuant to Section 109 (L) of Republic Act No. 9337. ESCcaT The Cooperative Development Authority issued a Certificate of Registration bearing the Registration No. ILO-1426 dated 4 February 1993 to Negros Consolidated Farmers Multi-Purpose Cooperative (COFA). It remains a cooperative of good standing up to the present as evidenced by the issuance of the Certificate of Good Standing dated 8 May 2007 covered by CGS No. ILO-07-68. Several sugarcane farmers from Negros Occidental voluntarily decided to combine their resources to form COFA as a multi-purpose cooperative for the sole purpose of undertaking an economic enterprise to meet the needs and demands of sugarcane farming, particularly the production and marketing aspects. As such, COFA decided to be the exclusive marketing arm of all its members and it has been issued by the Sugar Regulatory Administration with the Certificate of Registration as a Sugar Trader on 23 August 2007. The photocopy of the Certificate of Registration No. ILO-1426, Articles of Cooperation, By-Laws, Certificate of Good Standing and Certificate of Registration as a Sugar Trader issued by the Sugar Regulatory Administration. As a multi-purpose cooperative, COFA is an agricultural co-producer of the sugarcane produced by all its cooperative members. Being a juridical person, it is legally impossible for the cooperative to do the actual tillage of the land but the cooperative and all its members altogether 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 COFA, in its capacity as co-producer, has provided the following services to its members as its co-producers a. exclusively handles the marketing of sugar and molasses produced by the members' cane production (the members have been spared of the hassles of looking for buyers and through collective efforts, the members, through the cooperative, managed to obtain prices even above the average market prices); b. releases fertilizer subsidy and procures fertilizer in bulk, thus, availing of the wholesale price which is certainly lower than the retail price; DHTCaI c. provides cash advances to its members for crop preparation and cultivation to spare the cooperative members from loans with usurious rates of interests; d. arranges with other banking institution for members' agricultural crop loans and renders assistance to its members during milling season; e. facilitates the collection from and payment to cooperative members as to their trucking and hauling allowances; f. has represented all its members in negotiations with private and government agencies and institutions on policies, regulations, contracts and other matters affecting the sugar industry; g. provides free education and manpower training to its members' dependents; h. has launched initiatives to improve the living conditions of its members, particularly on the health aspect of its members and their dependents; and i. provides transloading operations that helped the members in transporting their canes to the mill site at the least cost; The existence of the raw sugar, the primary product of the sugarcane farms produced by the cooperative members, was certainly made possible through the shared efforts of the Cooperative and its members in their capacity as co-producers. The co-production arrangement allowed 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, COFA is but one in "COLLECTIVE SPIRIT" with its members. Moreover, being the exclusive marketing arm of the harvested sugarcane from the various farms of its members, the cooperative 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 in the name of COFA. The sugarmill issues the quedan of the raw sugar in the name of COFA pursuant to the membership agreement that the cooperative will be solely and exclusively tasked to market the sugar, molasses and other derivative products. Thereafter, COFA turns over to its members the net proceeds of the sale of the sugarcane produce. When COFA further decides to process the produced raw sugar of its members into refined sugar, the sugarmill issues refined sugar quedan in the name of COFA. DSIaAE When COFA 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, COFA is holding a tax exemption pursuant to BIR Ruling No. ECCP-004-2003 dated 23 April 2003 pursuant to Republic Act No. 6938 and the pertinent provision 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. 4.109-1. 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. aEcTDI 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) The farmer-members of COFA joined together to form the COFA 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, COFA and its members' respective roles in the operation of the cooperative cannot be treated as separate and distinct from each other. Notwithstanding that COFA 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, COFA has direct participation in the sugarcane production of its farmers-members. DTCSHA Accordingly, this Office hereby confirms your opinion that the sale of sugar produce made by COFA 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. 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