United Cadiz Sugar Farmers Multi-Purpose Cooperative

January 25, 2008 BIR RULING [ECCP-015-08] 109; R.A. 6938; RR 20-2001; ECCP-002-2003; ECCP-006-2006; ECCP-043-2007 United Cadiz Sugar Farmers Multi-Purpose Cooperative AGMAC Building, Brgy. Mandalagan, Bacolod City Attention: Mr. Eric E. Lacson Vice Chairman Gentlemen : This refers to your letter dated January 9, 2008 requesting for confirmation of your opinion that the sale of sugar produce made by United Cadiz Sugar Farmers Multi-Purpose Cooperative ("UCSFAMPC" for brevity) is exempt from the payment of VAT pursuant to Section 109 (L) of Republic Act No. 9337. The UCSFAMPC is a multi-purpose cooperative duly organized in accordance with the Cooperative Development Authority (CDA) on 14 January 2004 and consistently of good standing, as a cooperative, over the years. UCSFAMPC 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 meeting their common needs and for protecting their agricultural endeavors from the various forces affecting their operations, among them the providers of capital for sugarcane production activities, the sugarcane mills, sugar traders, competitors, new farming techniques and technology and government regulations. Being a multi-purpose cooperative, UCSFAMPC undertakes two or more business activities. As an agricultural producer and juridical person, UCSFAMPC, jointly undertakes the sugar farming activities with its cooperative members. Its farmers-members do the actual tillage of the sugar plantation while the cooperative provides the various production inputs, through cash advances and fertilizer loans. To introduce its members to new farming techniques, technology and systems, free educational trainings and seminars were conducted by UCSFAMPC to its cooperative members. To further spare its members from the various forces and unscrupulous sugar trading activities, UCSFAMPC has been the sole and exclusive marketing arm for its members' sugarcane produce. Hence, UCSFAMPC was issued with a Certificate of Registration as a Sugar Trader by the Sugar Regulatory Administration. AHDcCT Indubitably, the existence of the sugarcane, as the primary product of the UCSFAMPC members, was made possible through the joint undertaking of the Cooperative and its members. As the exclusive marketing arm of the sugarcane production of its members, UCSFAMPC is responsible in marketing 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 UCSFAMPC 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 members. As members of UCSFAMPC, 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 under the "co-production arrangement", it enables the cooperative 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. 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 UCSFAMPC by virtue of the membership agreement that the cooperative will be solely and exclusively responsible in selling the sugar, molasses and other derivative products. Thereafter, UCSFAMPC turns over to its members the net proceeds of the sale of the sugarcane produce. Where UCSFAMPC decides to further process the produced raw sugar of its farmers-members into refined sugar, the sugarmill issues the refined sugar quedan in the name of the UCSFAMPC. Hence, in all the stages of sugar production, the members and the cooperative are but one in "COOPERATIVE SPIRIT". At present, UCSFAMPC is holding a tax exemption pursuant to BIR Ruling No. RR12-08-2004, Series of 2004 dated March 2, 2004 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;" 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. aTADcH 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 UCSFAMPC joined together to form the UCSFAMPC 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, UCSFAMPC and its members' respective roles in the operation of the cooperative cannot be treated as separate and distinct from each other. Notwithstanding that UCSFAMPC 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, UCSFAMPC 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 UCSFAMPC 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