VMC Farmers Multi-Purpose Cooperative

February 1, 2008 BIR RULING [ECCP-019-08] 109; R.A. 6938; RR 20-2001; ECCP-002-2003; ECCP-006-2006; ECCP-043-2007 VMC Farmers Multi-Purpose Cooperative Bacolod City, Negros Occidental Attention: Mr. Jose V. Ledesma IV Chairman of the Board Gentlemen : This refers to your letter dated January 18, 2008 requesting for confirmation of your opinion that the sale of sugar produce made by VMC FARMERS MULTI-PURPOSE COOPERATIVE ("VIMACA" for brevity) is exempt from the payment of VAT pursuant to Section 109 (L) of Republic Act No. 9337. The VIMACA was issued by the Cooperative Development Authority with a Certificate of Registration covered by Registration No. ILO-132 on 22 May 1991. Up to the present, VIMACA remains a cooperative of good standing as evidenced by the issuance of Certificate of Good Standing dated 17 August 2007 covered by CGS No. ILO-07-116. VIMACA was formed after several sugarcane farmers from Negros Occidental voluntarily agreed to pool their resources to form a cooperative with the sole purpose of undertaking an economic enterprise to meet their common needs, particularly a) to make the cooperative as the vehicle by which members can acquire their farm needs at the lowest cost and under the best terms and conditions possible; b) to make the cooperative as the marketing arm of the members through which they can have better prices and returns for their sugarcane produce; c) to engage in the manufacture of organic fertilizers; d) to improve the agricultural and economic environments of the members by providing them with medium through which they can express their collective views on matters affecting their farms, and share technical information on how to improve their farm practices; HIEASa e) to assist the members to obtain better financial assistance from both non-government and government agencies such as the Land Bank of the Philippines; and f) to engage in other activities that will redound to the benefits of the members and the public who utilized or use the produce of farmers and planters. Being the exclusive marketing arm of its members, VIMACA has been issued by the Sugar Regulatory Administration with the Certificate of Registration as a Sugar Trader on 29 August 2006. Being a multi-purpose cooperative, VIMACA is an agricultural co-producer of the sugarcane produced by its cooperative members. Since VIMACA is an artificial person, it is physically impossible to do the actual tillage of the land. Hence, the cooperative and its members jointly 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 VIMACA has provided the following services, in its capacity as co-producer, to wit: 1) procurement of fertilizer for its members; 2) provides other production inputs to increase the sugarcane production of its members; 3) releases cash advances or loans to its members during the production and milling stages to protect its members against imposition of usurious interests; 4) provides educational training seminar for production improvement and development; 5) facilitates technology transfer affecting sugar production and/or intercropping production; and 6) acts as the exclusive marketing arm of the sugar produced from the various farms of its cooperative members. Without doubt, the existence of the raw sugar, the primary product of the sugarcane farms produced by the cooperative members, was made possible through the joint efforts of the Cooperative and its members in their capacity as co-producers. VIMACA renders the following services to its members to wit: a) provides molasses advances; b) procurement of fertilizer for its members below the market prices; HAICcD c) procurement of diesel fuel and motor oil below market prices; d) manufactures organic fertilizer for the usage of member/planter in the production of sugarcane; e) imports tractors and farm implements for the usage of cooperative members; f) opens sales outlets in Victorias City, Negros Occidental for items needed in the propagation of sugarcane; g) initiates contacts with other cooperatives in Manila and Mindanao for the sale of sugar and organic fertilizer; and h) acts as the exclusive marketing arm of the sugarcane produce of its members. With the co-production arrangement of the members with the cooperative, it allows 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, VIMACA and its cooperative members are but one in "COOPERATIVE SPIRIT". As the exclusive marketing arm of the harvested sugarcane from the various farms of its members, VIMACA 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 VIMACA. The sugarmill issues the quedan of the raw sugar produced in the name of VIMACA by virtue of the membership agreement that the cooperative will be solely and exclusively tasked to market the sugar, molasses and other derivative products and thereafter, VIMACA turns over to its members the net proceeds of the sale of the sugarcane produce. In instances where VIMACA decides to further process the produced raw sugar of its members into refined sugar, the sugarmill issues refined sugar quedan in the name of VIMACA. When VIMACA 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 cash advances before liquidating or paying the amount due to its members. At present, VIMACA is holding a tax exemption pursuant to BIR Ruling No. 109 (r) & (t) 006-2001, DA-103-2001 and ECCP-012-2001 dated 22 June 2001 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. DCAEcS 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 VIMACA joined together to form the VIMACA 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, VIMACA and its members' respective roles in the operation of the cooperative cannot be treated as separate and distinct from each other. Notwithstanding that VIMACA 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, VIMACA 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 VIMACA 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