San Carlos Agricultural District Multi-Purpose Cooperative

February 15, 2008 BIR RULING [ECCP-031-08] 109; R.A. 6938; RR 20-2001; ECCP-002-2003; ECCP-006-2006; ECCP-043-2007 San Carlos Agricultural District Multi-Purpose Cooperative 4th Floor Sta. Clara Estate Bldg. Mandalagan, Bacolod City Attention: Mr. Julio M. Manalo Chairman of the Board Gentlemen : This refers to your letter dated January 7, 2008 requesting for confirmation of your opinion that the sale of sugar produce made by SAN CARLOS AGRICULTURAL DISTRICT MULTI-PURPOSE COOPERATIVE ("SCAD-MPC" for brevity) is exempt from the payment of VAT pursuant to Section 109 (L) of Republic Act No. 9337. The SCAD-MPC was organized by the members on December 8, 1999 under R.A. No. 6938 and duly registered with the Cooperative Development Authority (CDA) as evidenced by the issuance of Certificate of Registration No. ILO-4015. At present, SCAD-MPC is holding a tax exemption pursuant to Republic Act No. 6938 and the pertinent provisions of the Tax Code of 1997, as confirmed by the BIR Ruling No. RR-12-28-2001 dated September 28, 2001 issued by the Bureau of Internal Revenue, Revenue Region No. 12. As an agricultural multi-purpose cooperative, SCAD-MPC is jointly engaged with its members in the cultivation, propagation and harvesting of sugarcane crops, and in the production and sale of raw and refined sugar. The sugarcane crops are grown in the sugar farms owned or leased by the members with the cooperative supplying the funds for the cost of farm operations including the cost of farm inputs. The raw and refined sugar which comes from the processing of sugarcane are covered by sugar quedans which are issued by the sugar mill and refinery in the name of the cooperative as owner and producer. Sugar quedans are the primary document of title in so far as ownership and production of sugar is concerned. To comply with the requirement of the Sugar Regulatory Administration (SRA) before it could be allowed to have its raw sugar processed into refined sugar, the cooperative has secured a Certificate of Registration as a sugar trader. acAIES To meet the requirements of its operation and pursuant to its objectives as a cooperative, SCAD-MPC provides, among other things, the following services to its members, to wit: a) Supply of production inputs and marketing of their produce b) Financial assistance in the form of loans and advances, such as: Crop loans Pesada loans Fertilizer loans Other c) Assistance in the socio-economic projects of members' farm workers d) Seminars on cooperatives and modern farm practices e) Other financial and technical assistance Membership in the cooperative is limited to sugar farmers, which is the common bond of interest among them. The cooperative deals only for the interest of its members, whether in the procurement of farm inputs or in the sale of its produce and the produce of its members. It has no dealings for the benefit of non-members or third persons. In accordance with the provisions of R.A. 6938 and its own By-Laws, the net savings that SCAD-MPC realizes every year is allocated to the following statutory funds namely: General Reserve Fund Ten Percent (10%) Educational & Training Fund Ten Percent (10%) Optional Fund Ten Percent (10%) The balance of the yearly net savings realized from its operation is allocated or distributed by the cooperative to its members in the form of patronage refund and interest on share capital. Because of its need for capital growth, the cooperative has retained a substantial portion of the patronage refunds and interest on share capital of members for the past years and applied them as additional share capital. This accounts for by the increase in the authorized share capital from the initial amount of One Million (P1,000,000.00) Pesos in 2001 to Five Million (P5,000,000.00) Pesos in 2009. These savings have enabled the cooperative to expand its operation and meet the increasing financial needs of the members. The operation of SCAD-MPC has enabled the members to attain maximum economic benefits from their participation in the cooperative as well as from their own farm operations, freed them from high interest cost from the financial borrowings and promotes peace and order in the localities where the members reside. EcDTIH That the cooperative has complied with all the requirements and conditions for its continued existence as such under the law is shown by the fact that the Cooperative Development Authority, the government agency tasked by R.A. No. 6938 to regulate and administer cooperatives in the Philippines, has consistently issued certificates of good standing and certificates of operation to SCAD-MPC. Finally, the cooperative, as required by law, files its yearly annual income tax return to the BIR, including its audited financial statements for the period ended August 31, 2007. 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) 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. 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 SCAD-MPC joined together to form the SCAD-MPC 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, SCAD-MPC and its members' respective roles in the operation of the cooperative cannot be treated as separate and distinct from each other. Notwithstanding that SCAD-MPC 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, SCAD-MPC 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 SCAD-MPC 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