Mr. Roberto L. Hinolan

February 29, 2008 BIR RULING [ECCP-035-08] 109; R.A. 6938; RR 20-2001; ECCP-002-2003; ECCP-006-2006; ECCP-043-2007 Mr. Roberto L. Hinolan Room 1 JTL Bldg., B.S. Aquino Drive Bacolod City Sir : This refers to your letter dated February 26, 2008 requesting in behalf of your client, PILIPINAS MULTI-PURPOSE COOPERATIVE ("PMPC" for brevity) for confirmation of the sale of sugar produce made PMPC is exempt from the payment of VAT pursuant to Section 109 (L) of Republic Act No. 9337. The PMPC is an agricultural multi-purpose cooperative with Certificate of Registration No. ILO-5122-XL dated December 14, 2007 issued by the Cooperative Development Authority and Sugar Regulatory Administration and with a Certificate of Registration as a Sugar Trader issued by the Sugar Regulatory Administration. Among its objectives is to engage in sugar production as co-producer in the sugarcane production of its cooperative members by providing financial assistance during the land preparation, cultivation, fertilization and harvesting stages of sugar production through the granting of cash advances for agricultural inputs such as fertilizers/pesticides and production inputs like contract plowing/tilling and milling. At the expense of the cooperative, the members will be required to attend seminars on technology transfer, sustainable sugarcane farming and encourage its members to propagate high yielding varieties to increase their production for economic in dependence. To obtain better prices for their produce, PMPC will exclusively market the sugarcane produce of its members by the pooling of the sugar 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 sugar mill in the name of the cooperative. The sugarmill will issue the quedan of the raw sugar produced in the name of PMPC by virtue of the membership agreement that the cooperative will be solely and exclusively responsible in selling the sugar, molasses and other derivative products. PMPC will turn over its members the net proceeds of the sale of the sugar and molasses. In the case PMPC decides to process the raw sugar produced of its cooperative members into refined sugar, the sugar mill will issue the refined sugar quedan in the name of the cooperative. Hence, in all instances, the members and the cooperative are one entity. The cooperative will not engage in the purchase of sugarcane produce from the non-members. IaEACT Being the exclusive marketing arm of its members, the cooperative is likewise assured of collecting the various loans and cash advances released to its members by deducting all cash advances from their proceeds. In effect each coop member will actually contribute their sugar produce to the cooperative and through a co-production arrangement of the members with the coop, it allows the members to attain increased productivity, income and equitable distribution of new surplus. At present, PMPC is holding a tax exemption certificate dated January 18, 2008 under BIR Ruling No. ECCP-10-2000, ECCP-004-2005 and ECCP-008-2008, pursuant to Republic Act No. 6938 and the pertinent provisions of the Tax Code of 1997. 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. (1) 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 cooperative 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. DCIAST 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 PMPC joined together to form the PMPC 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, PMPC and its members' respective roles in the operation of the cooperative cannot be treated as separate and distinct from each other. Notwithstanding that PMPC 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, PMPC 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 PMPC 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