DLS Irrigators Association, Inc.

January 15, 2010 BIR RULING [NSNP-(S30J-001) 001-10] Sec. 30 (J); BIR Ruling No. DA-031-05 DLS Irrigators Association, Inc. Langkong, M'lang, Cotabato Attention: Ms. Pablita S. Paclibar President Gentlemen : This refers to your letter dated October 6, 2008, received by this Office on February 11, 2009 by way of 1st Indorsement from Revenue District Office No. 108-Kidapawan City, requesting tax exemption of DLS Irrigators Association, Inc. Documents submitted disclose that DLS Irrigators Association, Inc. (DLS-IA) with Taxpayer Identification No. 005-969-912-000, is a non-stock, non-profit organization registered with the Securities and Exchange Commission (SEC) under SEC Registration No. CN2003-319080 dated September 12, 2003; that the purposes for which it was incorporated are the following: "1. To initially serve as a foundation in strengthening the agrarian reform and cooperative development programs of the government; 2. To operate and maintain the irrigation facilities and appurtenant structures by regulating and distributing the water supply equitably thru proper irrigation water management in accordance with the existing laws of irrigations; 3. To serve as a channel between government and private agencies in the provision of technical assistance and other support services concerning irrigated agriculture development and water management implementation at farm level. AHacIS 4. To act as the catalyzer for payment of loans, land amortizations, irrigation fees, or for outright sale to previously determined buyer, as well as in the distribution of supplies intended for farmers to facilitate transactions between the farmers and the concerned parties; 5. To encourage participation of the farmer-irrigators in promoting a wholesome community life and enhance community prosperity; 6. To serve as a vehicle for the speedy integration of resources; skills and talent of manpower for maximum productivity and economic advantage; 7. To promote continuous group action/cooperative work; thereby enhancing the execution of farm activities to benefit the water-users; 8. To implement a planned thrift and savings program among its members; 9. To cooperate and federate with similar associations to spearhead the growth and development process or cooperativism. that the organization shall be maintained by fees, dues, assessments, or charges paid by its members, as well as voluntary contributions from persons, partnerships, corporation and other entities; and that no part of its income inures to the benefit or profit of any private individual or entity, nor distributable as dividend, compensation, or any other form of remuneration or pecuniary benefit to its Trustees, officers, members, donors or contributors; and that in case of dissolution, the remaining assets of the corporation shall be distributed to another foundation or non-stock, non-profit corporation of the same or similar nature and objectives. Income Tax In reply, please be informed that based on documents submitted, DLS-IA is a mutual irrigation company of a purely local character the income of which consists solely of assessments from members as contemplated under Section 30 (J) of the Tax Code of 1997, as amended. Accordingly, it is exempt from the payment of tax on income received by it as such organization. TAIEcS However, DLS-IA is subject to the corresponding internal revenue taxes imposed under the National Internal Revenue Code on its income derived from any of its properties, real or personal, or any activity conducted for profit regardless of the disposition thereof, which income should be returned for taxation. Likewise, interest income from currency bank deposits and yield or any other monetary benefits from deposit substitute instruments and from trust funds and similar arrangements, and royalties derived from sources within the Philippines are subject to the 20% final withholding tax: provided, however, that interest income derived by it from a depository bank under the expanded foreign currency deposit system shall be subject to 7-1/2% final withholding tax pursuant to Section 27 (D) (1), in relation to Section 57 (A), both of the Tax Code of 1997. Moreover, it is required to file on or before the 15th day of the fourth month following the end of the accounting period a Profit and Loss Statement and Balance Sheet with the Annual Information Return under oath, stating its gross income and expenses incurred during the preceding period and a certificate showing that there has not been any change in its By-laws, Articles of Incorporation, manner of operation and activities as well as sources and disposition of income. It should be understood that the said exempt organization shall be constituted as withholding agent of the government if it acts as an employer and its employees receive compensation income subject to the withholding tax under Section 79 (A), Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations (Rev. Regs.) No. 2-98, as amended, or if it makes income payments to individuals or corporations subject to the expanded withholding tax provided for in Section 57 (B) of the Tax Code of 1997, also as implemented by Rev. Regs. No. 2-98, as amended (BIR Ruling No. S30-047-01 dated June 5, 2001) . Under Section 235 of the Tax Code of 1997, any provision of existing general and special law to the contrary notwithstanding, the books of accounts and other pertinent records of tax-exempt organization or grantees of tax incentives shall be subject to examination by the BIR for purposes of ascertaining compliance with the conditions under which it has been granted tax exemptions or tax incentives, and its tax liabilities, if any. VAT Moreover, the tax exemption granted to DLS-IA as a non-stock, non-profit corporation under Section 30 of the Tax Code of 1997 covers only income taxes for which it is directly liable. Section 105 of the Tax Code of 1997 provides that any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of the same Code. ACTISE The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. It should be noted that VAT is an indirect tax payable by the seller and not by the purchaser of goods. However, being an indirect tax, it can be shifted or passed on to the buyer/purchaser, transferee or lessee of the goods, properties or services. Once shifted to the buyer/customer as an addition to the cost of goods or services sold, it is no longer a tax but an additional cost which the buyer/customer has to pay in order to obtain the goods or services. Thus, the shifting of the VAT to it does not make it the person directly liable and therefore, it cannot invoke its tax exemption privilege under Section 30 of the Tax Code of 1997 to avoid the passing on or shifting of the VAT. Accordingly, if DLS-IA is engaged in the sale of goods or services in the course of a business pursuit, including transactions incidental thereto, in general, it shall also be liable for VAT (BIR Ruling No. S30-27-2003 dated November 21, 2003 & DA-043-2004 dated February 4, 2004) . Likewise, revenue from contributions and donations, not being derived from sale of services or sale of goods made in the course of business but rather in connection with its non-stock, non-profit activities, is exempt from the 12% VAT. Hence, notwithstanding that it is a non-stock, non-profit corporation, its purchase of goods or properties or services and importation of goods shall nevertheless be subject to the 12% VAT pursuant to Section 107 of the said Code (VAT Ruling No. 119-90 dated May 14, 1990 and BIR Ruling No. DA-043-2004 dated February 4, 2004) . This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. DECcAS Very truly yours, Commissioner of Internal Revenue By: (SGD.) MARISSA O. CABREROS OIC-Assistant Commissioner Legal Service