Bureau of Local Government Finance Opinion

May 17, 2010 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mr. Ricardo T. Cawed, CPA ICO-Regional Director Bureau of Local Government Finance Cordillera Autonomous Region 2nd Floor, LBP Building 84 Harrison Road Baguio City Sir : This refers to your follow-up letters dated September 18, 2009 and May 5, 2010, respectively, relative to the letter of Mr. Lawrence Bayongan, Municipal Administrator of Tabuk, Kalinga regarding the Tabuk Multi-Purpose Cooperative (TAMPCO) which LGU Tabuk billed for business tax based on the Undivided Net Surplus for Allocation. At the outset, we take this opportunity to extend our apologies for the delay in making this reply, which however was not in any way deliberate but occasioned by our anticipation of the approval of R.A. No. 9520, an Act amending R.A. No. 6938, otherwise known as Cooperative Code of 2008, hoping that it will include among others, the issues submitted for resolution. Unfortunately, they were not. In view hereof, this Bureau is therefore obliged to issue this opinion on the aforecited queries based on the pertinent provisions of both the Local Government Code (LGC) of 1991 and R.A. No. 6938, otherwise known as the Cooperative Code of the Philippines. 1. Whether the definition of Accumulated Reserves and Undivided Net Savings cited under BIR Revenue Regulations 20-2001 is also applicable to local taxation; and 2. Whether the sales/services rendered to nonmembers by the cooperative is based on gross receipts. Query No. 1 Section 2 of BIR Revenue Regulations No. 20-2001 dated November 12, 2001 defines Undivided Net Savings and Accumulated Reserves as follows: "SEC. 2. Definitions. "xxx xxx xxx "(h) Undivided Net Savings refers to the amount arising from net surplus or any portion thereof which the Board of Directors of the General Assembly of the cooperative decides not to divide or make available to members in the form of interest on share capital, patronage refund, reserves refund, education and training fund, optional fund or any other statutory reserve; this also includes the amount arising from the net surplus or any portion thereof which the cooperative is unable to divide because the General Assembly of the cooperative has not been convened for more than two (2) years; ITScHa "(i) Accumulated Reserves refers to the amount of accrued sum of money annually retained and deducted from the net surplus which is not intended for allocation or distribution to the members, usually deposited in the bank for the protection of and stability of the cooperative commonly referred to as the General Reserve Fund." From the abovequoted definitions of the terms Undivided Net Savings and Accumulated Reserves , it may be carefully informed that the same are not applicable to local taxation. This is so for the simple reason that local business tax, except perhaps for Peddler's Tax, is basically based on Gross Sales/Receipts . For a better appreciation why the terms Undivided Net Savings and Accumulated Reserves are not applicable to local taxation, presented below is a typical Income Statement of a cooperative to illustrate a normal operation: XYZ Multi-Purpose Cooperative Statement of Operations Year Ended December 31 Notes 2009 2008 Income from Credit Pxxx Pxxx Trading xxx xxx Others xxx xxx Gross Income Pxxx Pxxx Other Income xxx xxx Total Gross Income Pxxx Pxxx Less: Financing Costs P(xxx) P(xxx) Administrative Expenses (xxx) (xxx) Income from Operations Pxxx Pxxx Prior Years Adjustment (xxx) (xxx) Net Surplus Available for Distribution Pxxx Pxxx Distributed as Follows: Statutory Funds: General Reserve Fund Pxxx Pxxx Education and Training Fund xxx xxx Optional Fund xxx xxx Pxxx Pxxx Interest on Share Capital and Patronage Refund Pxxx Pxxx Net Surplus and Distributed Pxxx Pxxx ==== ==== Based on the above discussion the imposition of local business tax (LBT) is basically based on gross sales or receipts, therefore it is logical to assume that the terms Undivided Net Savings and Accumulated Reserves are not applicable as in the case of TAMPCO. Needless to say, from the above illustration, the accounts Undivided Net Savings and Accumulated Reserves are both included in the account NET SURPLUS AVAILABLE FOR DISTRIBUTION, which is a derivative of the TOTAL GROSS INCOME before any deduction and from which LBT is computed from. In short, both the Undivided Net Savings and Accumulated Reserves are derived from gross receipts which are the basis in the computation of LBT. Applying therefore the rule that LBT, except for Peddler's Tax, is based on Gross Sales or Receipts, Undivided Net Savings and Accumulated Reserves will not apply in the case of TAMPCO. In this connection, attention is invited therefore to Section 61 of R.A. No. 9520, quoted as follows: "ART. 61. Tax and Other Exemptions. Cooperatives transacting business with both members and nonmembers shall not be subject to tax on their transactions to members. In relation to this, the transactions of members with the cooperative shall not be subject to any taxes, fees, including but not limited to final taxes on members' deposits and documentary tax. Notwithstanding the provisions of any law or regulation to the contrary, such cooperatives dealing with nonmembers shall enjoy the following exemptions: "(1) Cooperatives with accumulated reserves and undivided net savings of not more than Ten million pesos (P10,000,000.00) shall be exempt from all national, city, provincial, municipal or barangay taxes of whatever name and nature. . . . . "(2) Cooperatives with accumulated reserves and undivided net savings of more than Ten Million Pesos (P10,000,000.00) shall pay the following taxes at the full rate: "xxx xxx xxx. "(c) All other taxes unless otherwise provided herein. "(3) All cooperatives, regardless of the amount of accumulated reserves and undivided net savings shall be exempt from payment of local taxes and taxes on transactions with banks and insurance companies: Provided, That all sales or services rendered for non members shall be subject to the applicable percentage taxes except sales made by producers, marketing or service cooperatives. "xxx xxx xxx." (Emphasis ours) Applying the abovequoted provision of law, TAMPCO will only be subject to local business tax if its accumulated reserves and undivided net savings are more than Ten Million Pesos (P10,000,000.00) otherwise, exempt. It must be pointed out however, that while it is clear that the terms accumulated reserves and undivided net savings are mentioned in the abovequoted provision of R.A. No. 9520, they are not meant to be the basis in the computation of LBT but rather as threshold by which a cooperative may be subjected to taxes or not. HEScID Further, it must be noted that the phrase "All other taxes" is followed by a conditional qualifying phrase "unless otherwise provided herein". This qualifying phrase should be interpreted as referring to Item (1) of Section 61 abovequoted, which exempts cooperatives, with accumulated reserves and undivided net savings of not more than Ten million pesos (P10,000,000.00), from all national, city, provincial, municipal or barangay taxes of whatever name and nature . In the same vein, Item (3) above categorically provides that "[A]ll cooperatives, regardless of the amount of accumulated reserves and undivided net savings shall be exempt from payment of local taxes . . . " but only on transactions with banks and insurance companies. On Query No. 2 With regard to the term sales/services , Article 61 (3) of R.A. No. 9520 abovequoted and as already discussed, LBT even if applied to cooperatives which are not otherwise exempt from local imposition, shall be based on gross receipts, except Peddler's Tax . (Section 143 [g] of the LGC) Be guided accordingly. (SGD.) MA. PRESENTACION R. MONTESA Executive Director