Sagay-Escalante Planters Association Multi-Purpose Cooperative (SAGESPLASMPC)

January 23, 2008 BIR RULING [ECCP-013-08] 109; R.A. 6938; RR 20-2001; ECCP-002-2003; ECCP-006-2006; ECCP-043-2007 Sagay-Escalante Planters Association Multi-Purpose Cooperative (SAGESPLASMPC) Barangay Paraiso, Sagay City Negros Occidental Attention: Mr. Luis Miguel C. Trebol Chairman of the Board Gentlemen : This refers to your letter dated January 10, 2008 requesting for confirmation of your opinion that the sale of sugar produce made by Sagay-Escalante Planters Association Multi-Purpose Cooperative, Inc. ("SAGESPLASMPC" for brevity) is exempt from the payment of VAT pursuant to Section 109 (L) of Republic Act No. 9337. The SAGESPLASMPC is an agricultural multi-purpose cooperative duly organized in accordance with Republic Act No. 6938 as evidenced by the issuance of Certificate of Registration No. ILO-4945 dated 14 July 2006. From 2006 up to the present, SAGESPLASMPC remains a cooperative of good standing. Being an agricultural multipurpose cooperative, among its objectives is to supply production inputs to its members and to market their products. As a consequence, SAGESPLASMPC has been issued by the Sugar Regulatory Administration with the Certificate of Registration as a Sugar Trader. After its incorporation as a bonafide cooperative, SAGESPLASMPC became a "co-producer" along with its cooperative members in the sugar production. Together, the cooperative and its members carry out the sugar farming activities during the agricultural crop year. As a juridical person and artificial person, SAGESPLASMPC has made available and provided its members, during the cultivation and milling stages of sugar production, the various production inputs such as organic fertilizer and chemical fertilizer, information dissemination on the use of good varieties of sugarcane, proper sugar fanning methods and techniques. It has provided its members with technical assistance on sugarcane production. Furthermore, SAGESPLASMPC is the forefront and the moving vehicle in encouraging its members to propagate high yielding varieties considering that its main objective is to increase the production of its members for economic independence. Cash advances and short-term loans to members were likewise made available by the cooperative to its members for productive and provident purposes. To help the farmers during the milling season, the cooperative acts as liaison with the sugar mill on matters related to sugar production. There is no doubt that the existence of raw sugar from the sugarcane harvested by the cooperative members from their respective farms was made possible through the joint efforts of the Cooperative and its members as "co-producers". Undeniably, SAGESPLASMPC has direct and active involvement in the sugarcane production of its members because 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 member to attain increased income and productivity through the promotion of equitable distribution of net surplus through maximum utilization of economies of scale, cost sharing and risk sharing. SAaTHc Moreover, to protect its members from unscrupulous practices employed by sugar and molasses traders, SAGESPLASMPC has been exclusively marketing the sugarcane produce of its members. In this way, the exclusive marketing scheme allowed the cooperative members to obtain better prices because of the pooling of the "quedans" duly issued in the name of the cooperative. The sugarcane 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 SAGESPLASMPC by virtue of the membership agreement that the cooperative will be solely and exclusively responsible to sell the sugar, molasses and other derivative products and thereafter, SAGESPLASMPC turns over to its members the net proceeds of the sale of the sugarcane produce. In case SAGESPLASMPC decides to process the produced raw sugar of its cooperative members into refined sugar, the sugarmill issues the refined sugar quedan in the name of the cooperative. Hence, in all instances, the members and the cooperative are one entity which is precisely the point in forming a cooperative to undertake an economic enterprise for the purpose of meeting their common needs. Being the exclusive marketing arm of its members, the cooperative is likewise assured of collecting the various loans and/or cash advances it released to its members by deducting all advances before liquidating or paying the amount due to its members. The cooperative has never been engaged in the purchase of sugarcane produce from non-members. At present, SAGESPLASMPC is holding a tax exemption pursuant to BIR Ruling No. 12-13-2006 dated 17 October 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;" AIaSTE Section 14 of RR 4-2007, in turn provides, viz. : "Section 14. VAT-Exempt Transactions . Sec. 4.109-1(B)(1) n 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) The farmer-members of SAGESPLASMPC joined together to form the SAGESPLASMPC 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. TSEAaD Thus, SAGESPLASMPC and its members' respective roles in the operation of the cooperative cannot be treated as separate and distinct from each other. Notwithstanding that SAGESPLASMPC 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, SAGESPLASMPC 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 SAGESPLASMPC 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