Negros Agricultural Entrepreneurs Multi-Purpose Cooperative (NAEMPC)

January 18, 2008 BIR RULING [ECCP-007-08] 109; R.A. 6938; RR 20-2001; ECCP-002-2003; ECCP-006-2006; ECCP-043-2007 Negros Agricultural Entrepreneurs Multi-Purpose Cooperative (NAEMPC) Door #6, Teresa Bldg., Highway Mandalagan Bacolod City Attention: Mr. Daryl Jonathan B. Delfin General Manager Gentlemen : This refers to your letter dated January 9, 2008 requesting for confirmation of your opinion that the sale of sugar produce made by Negros Agricultural Entrepreneurs Multi-Purpose Cooperative ("NAEMPC" for brevity) is exempt from the payment of VAT pursuant to Section 109 (L) of Republic Act No. 9337. EAaHTI The Cooperative Development Authority issued a Certificate of Registration to NAEMPC as a multi-purpose cooperative duly evidenced by the Certificate of Registration No. ILO-3804 dated 17 October 2000 and consistently of good standing, as a cooperative, over the years. NAEMPC is composed of several sugarcane farmers in Negros Occidental who agreed to form a cooperative to carry out an enterprise with the sole purpose of protecting their agricultural endeavors from the various forces of economy and the challenges of new farming techniques caused by environmental changes. Being a multi-purpose cooperative, NAEMPC undertakes two or more business activities. As an agricultural producer and juridical person, NAEMPC mutually and actively undertakes the sugar farming activities with its cooperative members. The cooperative members do the actual tillage of the sugar plantation while NAEMPC provides the various services as "co-producer", to wit: a) refining/tolling of the raw sugar produced by the cooperative members in Lopez Sugar Corporation refinery located at Brgy. Paraiso, Sagay City, Negros Occidental; b) provides and releases productive and emergency loans to its cooperative members; c) provides cash assistance to the cooperative members for their sugarcane planting, harvesting and milling costs and expenses; d) markets formulated organic fertilizers; and e) acts as the sole and exclusive marketing arm of the sugarcane produce of all its cooperative members. Without doubt, the existence of the sugarcane, the primary produce of the NAEMPC members was made possible through the joint undertaking and the co-production arrangement of the Cooperative and its members. In addition, as the exclusive marketing arm of the sugarcane production of its members, NAEMPC is responsible to market the exclusive produce of its members and it does not engage in the purchase of sugar produce from non-members. It is through the exclusive marketing system that NAEMPC will be assured of collecting the various loans it released to its cooperative members by deducting all advances before liquidating or paying the amount due to its cooperative members. As members of NAEMPC, the sugarcane farmers actually contributed as capital to the cooperative their sugarcane produce. And, through the joint endeavors and as "co-producers" of the sugarcane produce, the "co-production arrangement" enables the cooperative member through the cooperative, to attain increased income and productivity through the promotion of equitable distribution of net surplus through maximum utilization of economies of scale and cost and risk sharing. The sugarcanes produced by the cooperative members will be harvested, hauled, delivered and milled to the sugarmill in the name of the cooperative. The sugarmill issues the quedan of the raw sugar produced in the name of NAEMPC by virtue of the membership agreement that the cooperative will be solely and exclusively responsible to sell the sugar, molasses and other derivative products. Thereafter, NAEMPC turns over to its members the net proceeds of the sale of the sugarcane produce. In instances where NAEMPC decides to further process the produced raw sugar of its cooperative members into refined sugar, the sugarmill issues the refined sugar quedan in the name of NAEMPC. Hence, in all the stages of sugar production, the members and the cooperative are but one in "COOPERATIVE SPIRIT". IaEACT At present, NAEMPC is holding a tax exemption pursuant to BIR Ruling No. * R.A. 6938; ECCP-023-2000; ECCP-32-2000 dated December 29, 2000 pursuant to Republic Act No. 6938 and the pertinent provisions of the Tax Reform Act 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;" cTEICD 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. 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. TEcADS 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 NAEMPC joined together to form the NAEMPC 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, NAEMPC and its members' respective roles in the operation of the cooperative cannot be treated as separate and distinct from each other. Notwithstanding that NAEMPC 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, NAEMPC has direct participation in the sugarcane production of its farmers-members; HIESTA Accordingly, this Office hereby confirms your opinion that the sale of sugar produce made by NAEMPC 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