Sweet Negros Multi-Purpose Cooperative

January 18, 2008 BIR RULING [ECCP-008-08] 109; R.A. 6938; RR 20-2001; ECCP-002-2003; ECCP-006-2006; ECCP-043-2007 Sweet Negros Multi-Purpose Cooperative Hugos Walden Building, Senator Jose Locsin Street Silay City, Negros Occidental Attention: Mr. Jesus Antonio J. Locsin Chairman of the Board Gentlemen : This refers to your letter dated January 8, 2008 requesting for confirmation of your opinion that the sale of sugar produce made by Sweet Negros Multi-Purpose Cooperative ("SWEET NEGROS" for brevity) is exempt from the payment of VAT pursuant to Section 109 (L) of Republic Act No. 9337. DcaCSE The Cooperative Development Authority issued the Certificate of Registration No. ILO-4971 to SWEET NEGROS on 9 October 2006. Since then and up to the present, SWEET NEGROS remains a cooperative of good standing. Sugarcane farm owners from central Negros Occidental mutually agreed to organize and pool their resources on SWEET NEGROS with the sole objective of undertaking an economic enterprise to meet their common needs, particularly by engaging in the procurement of farm inputs supplies and/or any commodity needed by them and to exclusively market the produce of its members. Consequently, SWEET NEGROS has been issued by the Sugar Regulatory Administration with the Certificate of Registration as a Sugar Trader. Being a multi-purpose cooperative, SWEET NEGROS is an agricultural co-producer of sugarcane produced by all its cooperative members from their respective farms. Since SWEET NEGROS is an artificial person, whose existence is dependent on compliance with the Cooperative Code of the Philippines, the cooperative and its members jointly carry out the sugar farming activities. While the tillage of land has been consistently provided by the cooperative members, SWEET NEGROS has provided the various production inputs during the agricultural crop year as part of its procurement activities. The cooperative has provided cash advances during the production stage, particularly for canepoints, fertilizers, farm chemicals and other production inputs to spare the cooperative members from borrowing capital having usurious interests. SWEET NEGROS acted as the vehicle of modern farm practices and technology transfer by providing trainings for farm improvements and organic farming. Indubitably, the existence of the raw sugar, the primary product of the sugarcane produced by the cooperative members, was made possible through the joint and mutual efforts of the Cooperative and its members as co-producers. In reality, each cooperative member actually contributed their sugar produce to the cooperative. With the co-production arrangement of the members with the cooperative, it allows the members 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. Therefore, the members and the cooperative are but one in the spirit of "cooperative movement". As co-producer of the harvested sugarcane from the various farms of its members, SWEET NEGROS is solely responsible in marketing all the sugarcane produce of its members. It does not engage in the purchase of sugarcane produced by non-members. Without doubt, SWEET NEGROS acted as the sole and exclusive marketing arm of its members' sugarcane produce. When SWEET NEGROS 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. It is so because the sugarcane produced by the cooperative members will be harvested, hauled, delivered and milled to the sugarmill in the name of SWEET NEGROS. The sugarmill issues the quedan of the raw sugar produced in the name of SWEET NEGROS by virtue of the membership agreement that the cooperative will be solely and exclusively tasked to sell the sugar, molasses and other derivative products and thereafter, SWEET NEGROS turns over to its members the net proceeds of the sale of the sugarcane produce. In instances wherein SWEET NEGROS decides to further process the produced raw sugar of its members into refined sugar, the sugarmill issues refined sugar quedan in the name of SWEET NEGROS. At present, SWEET NEGROS is holding a tax exemption pursuant to BIR Ruling No. 12-14-2006, Series of 2006 dated 23 November 2006 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. 4.109-1. 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. 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) cTDECH The farmer-members of SWEET NEGROS joined together to form the SWEET NEGROS 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, SWEET NEGROS and its members' respective roles in the operation of the cooperative cannot be treated as separate and distinct from each other. Notwithstanding that SWEET NEGROS 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, SWEET NEGROS 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 SWEET NEGROS 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