Aminhan Sugar Farmers' Multi-Purpose Cooperative

February 22, 2008 BIR RULING [ECCP-033-08] 109; R.A. 6938; RR 20-2001; ECCP-002-2003; ECCP-006-2006; ECCP-043-2007 Aminhan Sugar Farmers' Multi-Purpose Cooperative Maraon St., Poblacion, Sagay City Negros Occidental Attention: Mr. Jose H. Puey, Jr. Chairman of the Board Gentlemen : This refers to your letter dated January 11, 2008 requesting for confirmation of your opinion that the sale of sugar produce made by AMINHAN SUGAR FARMERS' MULTI-PURPOSE COOPERATIVE ("ASFA-MPC" for brevity) is exempt from the payment of VAT pursuant to Section 109 (L) of Republic Act No. 9337. CTDacA The ASFA-MPC 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-4303 dated 19 December 2002. It remains a cooperative of good standing up to the present as evidenced by the Certificate of Good Standing covered by CGS No. ILO-07-136. ASFA-MPC was formed and created after several sugarcane farmers mutually pooled their resources with the sole purpose of undertaking an economic activity, through the cooperative, for the purpose of meeting their common needs as sugarcane farmers, particularly by providing sufficient capital and farm inputs to the cooperative members and exclusively market their produce. As an agricultural multi-purpose cooperative, one of its objective is to advance the cooperative movement as a technique for improving the status of its members. As a consequence, ASFA-MPC has been issued by the Sugar Regulatory Administration with Certificate of Registration as a Sugar Trader on 2 October 2007. As an agricultural cooperative, ASFA-MPC is a "co-producer" along with its cooperative members in the sugar production. Every agricultural crop year, the cooperative and its members jointly carry out the sugar farming activities. As a co-producer, ASFA-MPC has made available and provided its members, during the production stage, the various production inputs and trucking requirements during the milling season. The cooperative has extended loans to the cooperative members to finance the costs and expenses of the various farming activities, particularly during production stage. ASFA-MPC has always introduced to its members new farming technology to increase its sugarcane production. Without doubt, the production of the raw sugar from the sugarcane produced by the cooperative members was made possible through the joint participation of the cooperative and its members as co-producers. With the "co-production arrangement" of the cooperative members and the ASFA-MPC has resulted to increased income and productivity to the former through the promotion of equitable distribution of net surplus through maximum utilization of economies of scale and cost and risk sharing. To assure the members that their interest are protected, ASFA-MPC has acted as their sole and exclusive marketing arm for their sugarcane produce. Being the exclusive marketing arm of its members, the sugarcane produced by the cooperative members will be harvested, hauled, delivered and milled to the sugarmill in the name of the ASFA-MPC. The sugarmill issues the warehouse receipts ("quedan") of the raw sugar produced deliverable to the name of ASFA-MPC 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, ASFA-MPC turns over to its members the net proceeds of the sale of the sugarcane produce. In instances where ASFA-MPC decides to further process the produced raw sugar of its farmers-members into refined sugar, the sugarmill issues refined sugar quedan in the name of ASFA-MPC. Having been tasked as the exclusive marketing arm of its cooperative members, the cooperative is further assured of collecting the various loans and/or cash advances that were released to its cooperative members by deducting all cash advances before liquidating or paying the amount due. Hence, in all aspect of sugar production, the members and the cooperative are but one in "COOPERATIVE SPIRIT". ICAcaH At present, ASFA-MPC is holding a tax exemption as evidenced by the BIR Ruling No. RR-12-1-2004 dated 22 November 2004 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. IEAacS 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 ASFA-MPC joined together to form the ASIA-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, ASFA-MPC and its members' respective roles in the operation of the cooperative cannot be treated as separate and distinct from each other. Notwithstanding that ASFA-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, ASFA-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 ASF-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