Taxation Updates For COOPERATIVES

Dean Estelita C. Aguirre Resource Person

AIT

Learning through Quality Training

Objectives of the Seminar

To review: > the tax exemption provisions of COOP Code vis--vis the NIRC and the LGC; and > the COOP BIR compliance requirements. To present and clarify > recent tax rulings, RR and court decisions > problem areas affecting COOPs

AIT

Learning through Quality Training

Presentation Outline
Part I Review 1) Legal Bases of Exemptions 2) Classification of Coops 3) Tax Exemption/taxability of Coops 4) Taxability of COOP Members & Directors Part II Recent Development 1) CTA Decisions: Final Tax on Interest 2) RMC 34-2008 on Directors fees 3) RR14-2007 on Microfinancing 3) BIR ruling on CTE
AIT

Learning through Quality Training

Legal Bases of Exemptions

AIT

Learning through Quality Training

Legal Bases of Exemptions

1. Cooperative Code of the Philippines Article 61 Article 62 2. Bureau of Internal Revenue Section 109 of NIRC RR No. 20-2001 3. Local Government Code of 1991 Section 133 Section 234

AIT

Learning through Quality Training

Article 61 and 62, RA 6938 apply to

Art 61 Coops transacting with members only Art 62(1) Coops transacting with members and non-members with Reserves of P10M & below Art 62(2) Coops transacting with members and non-members with Reserves of over P10M

AIT

Learning through Quality Training

Local Government Code

Section 133(n) exempts all duly registered COOPs from taxes, fees and charges Section 234(d) exempts from real property taxes all real property owned by duly registered COOPs

AIT

Learning through Quality Training

Local Government Code

CDA Memo Circular 93-005 clarifies: Starting Jan 1, 1992, CDA-registered Coops shall exempt from local business taxes and charges. RA 7160 reiterated the exemption from local business taxes under PD 231 and expanded the exemption to include fees and charges.

AIT

Learning through Quality Training

Rev Regs 20-01, Nov 12, 2001

Exemptions: 1. Income tax on income from operations; 2. VAT under Sec 109, NIRC except Electric Coops ; 3. 3% percentage tax under Sec 116 of NIRC; 4. Donors tax to duly accredited charitable/ research/educational inst &reinvestment to socio-eco projects w/in the area of COOPs; 5. Excise tax under Title VI of the NIRC; 6. DST (the party who is not exempt pays); 7. Registration fee of P500.00

AIT

Learning through Quality Training

NIRC, as amended by RA 9337

VAT EXEMPTIONS
Section 109 (L) Agricultural Section 109 (M) Credit and Multi-purpose Section 109 (N) Non-agri,non-credit,non-elec

AIT

Learning through Quality Training

Classification of Coops

AIT

Learning through Quality Training

COOPs as Income Taxpayers

Kinds of Income Taxpayers 1. Individuals receiving compensation income 2. Business and professional income earners 2.1 individuals 2.2 corporations/associations 3. Passive Income Earners 4. Exempt Income Earners
AIT

COOPs COOPs

Learning through Quality Training

Coops as Business Taxpayers

Kinds of Business Taxpayers
1. VAT Taxpayers 1.1 12% VAT taxpayers 1.2 0% VAT taxpayers Electric COOPs

2. NON-VAT Taxpayers Other COOPs 2.2 Percentage taxpayers 2.3 Exempt taxpayers (from VAT/%Tax)

AIT

Learning through Quality Training

COOPs per RA 6938 according to

Purpose: Credit; Consumer; Producer; Marketing; Service; Multi-purpose Membership: primary; secondary; tertiary Customers: dealing with members only; dealing with members & non-members Accumulated Reserve Funds: w/ P10M or less; w/ > P10M Life: 10 years or less; more than 10 years
AIT

Learning through Quality Training

Exemption of COOPs
depends on whether
it deals w/ members only,regardless of reserves it deals w/ members and nonmembers, with P10M Reserve funds or less it deals w/ members and nonmembers, with over P10M Reserve Funds it is still within 10-year period
AIT

Learning through Quality Training

COOPs covered by exemption

Coops dealing with members only, regardless of reserves and years in existence. Coops dealing with members and non-members with accumulated reserves of not more than P10M, regardless of years in existence Coops dealing with members and non-members with accumulated reserves of more than P10M, during the first 10 years of existence.

AIT

Learning through Quality Training

Income and VAT Exemptions of COOPs

AIT

Learning through Quality Training

Coops transacting with members only Art 61

*Regardless of Reserve Surplus amount. *Exempted from national and local taxes *Period of exemption is continuing

AIT

Learning through Quality Training

COOPs transacting with non-members Art 62 (1)

*With Reserve Funds of P10M and below *Exempted on transactions with members and and non-members *Period of Exemption is continuing

AIT

Learning through Quality Training

COOPs transacting w/ non-members Art 62 (2)

*With Reserve Funds of more than P10M *Exemption for a period of 10 years, provided at least 25% of the net income is returned to members in the form of interest/patronage refund *After 10 years, income tax exemption shall be limited to members only
AIT

Learning through Quality Training

Sample CTE, excerpt:

. . . . . you are exempt from the ordinary income tax on your transactions with both members and non-members for a period of 10 years effective Feb 22, 1995, your date of registration with the CDA, pursuant to Art 62 of the Coop Code or until Feb 22, 2005. . .
(BIR Ruling ECCP-006-2006 May 25, 2006)

AIT

Learning through Quality Training

Sample CTE, excerpt:

. . . . Thereafter, your income tax exemption shall be limited to business transactions w/ members only. Provided further, that income tax exemption is still applicable to business transactions with non-members with reserves/undivided net savings of not more than P10M. . . . . . .
(BIR Ruling ECCP-006-2006 May 25, 2006)

AIT

Learning through Quality Training

Sample CTE, excerpt

After the lapse of 10 years, subject to income tax at the full rate on the amount allocated for interests on capital, provided that the same is not consequently imposed on interest individually received by members;. . .
(BIR Ruling ECCP-006-2006 May 25, 2006)

AIT

Learning through Quality Training

Sample CTE, excerpt:

Tax base shall be the net surplus arising from business transactions with non-members after deducting the amounts for the statutory reserve funds.
(BIR Ruling ECCP-006-2006 May 25, 2006)

AIT

Learning through Quality Training

Electric Cooperatives

RA 9337 repealed VAT exemption of electric cooperatives effective Nov 1, 2005. Income tax exemption stays in accordance with Sec 39, PD 269.

AIT

Learning through Quality Training

Electric Cooperative
Income Tax : NEA-registered - Exempt w/in 30 years CDA-registered dealing w/ members Exempt dealing w/ non-members Exempt w/in 10 years on business with non-members Value-Added Tax : NEA and CDA registered - Subject to 12 %
(BIR Ruling DA-384-2005 dated September 7, 2005) (BIR Ruling DA-108-2006 dated March 14, 2006
AIT

Learning through Quality Training

Sales by Agricultural Cooperatives

(Section 109 L)
Exempt from VAT Conditions: 1. duly registered with CDA 2. in good standing with CDA

AIT

Learning through Quality Training

Importation of Agri Coops

(Section 109 L)
Exempt from VAT: direct farm inputs, machineries and equipment and spare parts thereof Condition: to be used directly and exclusively in the production and/or processing of their produce

AIT

Learning through Quality Training

Sales by Agriculture Coop

Agri coop-producer - sale of agri- nonfood to members and non-members, exempt from VAT. Agri coop-trader sale of agri-nonfood to its members, exempt but sale to non-members subject to VAT. Sale of agri-food exempt at all times

AIT

Learning through Quality Training

Credit/Multi-Purpose Cooperatives
Section 109 (M)
Exempt from VAT Conditions: 1. duly registered with CDA 2. in good standing with CDA

Note: RA 9337 deleted the phrase whose lending operation is limited to members.
AIT

Learning through Quality Training

Lending Activities
. . .you are exempt from VAT under Sec 109 (t) of the Tax Code of 1997, as amended by R.A. 9337 on your gross receipts from lending activities to your members but NOT from those activities involving non-members. . . .

BIR Ruling ECCP-003-2006 March 30, 2006

AIT

Learning through Quality Training

Non-elec,non-agri,non-credit COOPs
Section 109 (N)
Exempt from VAT Conditions: 1. duly registered with CDA 2. in good standing with CDA 3. share capital contribution of each member does not exceed P15,000.

(BIR Ruling DA-029-06 dated February 2, 2006)

AIT

Learning through Quality Training

Other Tax Exemptions of COOPs

3% percentage tax under Sec 116 of NIRC Donors tax to duly accredited charitable/resarch/ educ inst & reinvestment to socio projects within the area of COOPs; Excise tax under Title VI of the NIRC; DST (the party who is not exempt pays); Registration fee of P500.00
AIT

Learning through Quality Training

Taxes due from Coops

AIT

Learning through Quality Training

COOPs with >P10M RF and >10 years in existence transacting with non-members

To be taxed on transactions with non-members only after 10 years from date of registration.

AIT

Learning through Quality Training

Business Activities not listed in the Articles of Cooperation.

Income of Coops not related to the main/ principal business, subject to all taxes under the Tax Code of 1997. Applicable to all Coops, whether dealing with members or both members and non-members.

AIT

Learning through Quality Training

Interest on bank deposits of COOPs

All COOPs are liable to pay 20% FT on Peso deposits and 7.5% on Dollar deposits.

(BIR Ruling 008-01; DA 029-06, etc.)

AIT

Learning through Quality Training

Sale or exchanges of Real Property

On sale of RP-capital assets: 6%CGT +1.5% DST on selling price or fair market value whichever is higher.

(BIR Ruling ECCP-003-2006)

AIT

Learning through Quality Training

Sale of Shares of stocks

On sale of shares of stocks: 5% on first P100,000 net gain 10% on the excess over P100,000 net gain 1.5% on the gross selling price if listed and traded in the Phil Stock Exchange

(BIR Ruling ECCP-003-2006)

AIT

Learning through Quality Training

12% VAT on Electric COOPs

All electric COOPs, whether CDA or NEA-registered are liable to pay the 12% VAT, eff Nov 1, 2005.

AIT

Learning through Quality Training

12% VAT on Purchases

. . . sales to COOPs are subject to VAT because the VAT is the statutory liability of the seller of goods and services so that absent any showing that the said seller is exempt from tax, the sale could not be exempted from VAT. Moreover, VAT is an indirect tax and the amount of tax may be passed on to the buyer. . .
(VAT RULING NO. 066-01 Oct 8, 2001)

AIT

Learning through Quality Training

TAXABILITY of Members and Directors of COOPERATIVES

AIT

Learning through Quality Training

Members of Cooperatives

The exemption of the Coops does not extend to the individual members.

(BIR Ruling ECCP-003-2006 dated March 30, 2006)

AIT

Learning through Quality Training

NS Distribution: RA 6938
Reserve Fund at least 10%

Education/Training Fund, not over 10% Optional Fund, not over Interest/Patronage refunds 10% 70%

(BIR Ruling DA 075-05, dated March 9, 2005)

AIT

Learning through Quality Training

NS Allocation: CDA MC 2000-08

Reserve Fund not over 65%

Education/Training Fund, not over 5% Optional Fund, not over 5%

Interest/Patronage refunds 25% (the remaining net surplus but not less than 25%)

(BIR Ruling DA 075-05, dated March 9, 2005)

AIT

Learning through Quality Training

Net Surplus to members

(Patronage Refunds)

Not Subject to Income Tax Not subject to VAT No need to declare in ITR

(BIR Ruling DA 075-05, dated March 9, 2005)

AIT

Learning through Quality Training

Net Surplus Distributed to Members

(Interest on members share capital)
Subject to Income Tax Not Subject to Withholding Tax Not subject to VAT To be declared in Income Tax Return
(BIR Ruling DA 075-05, dated March 9, 2005)

AIT

Learning through Quality Training

Interest on deposits
Not subject to withholding. Include in other taxable income in the income tax return. Subject to income tax under Section 24(A) of the NIRC
(BIR Ruling DA-591-2006 dated October 5, 2006)

(Reversed by the Court of Tax Appeal)

AIT

Learning through Quality Training

No DST-Members Share Certificate

Coop members contribution, being
entirely different in nature and in substance from corporate shares of stocks, not subject to DST under Section 174.

(BIR Ruling DA-591-2006 October 5, 2006)

AIT

Learning through Quality Training

Interest on bank deposits of Coop Employees Retirement Plan

Exempt from 20% FWT.

(BIR Ruling DA 259 dated April 12, 2006)

AIT

Learning through Quality Training

Recent Development

AIT

Learning through Quality Training

C.T.A. CASE NO. 6827. Feb 6, 2007

Dumaguete Cathedral Credit Coop petitioner, vs. CIR, respondent. Petitioner argues that it is not a banking institution, thus, the interests earned by its members from their savings and time deposits with the cooperative are not subject to withholding tax. . . .

AIT

Learning through Quality Training

C.T.A. CASE NO. 6827. Feb 6, 2007

The Court disagrees. Sec 24(B)(1) provides that a final tax at the rate of 20% is imposed on the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements. Petitioner's conduct of business constitutes activities under "similar arrangements" which is taxable under Sec 24(B)(1) of the NIRC.
AIT

Learning through Quality Training

C.T.A. EB CASE NO. 289 (CTA Case 6827) December 18, 2007 . . . it is clear that petitioner's conduct of business constitutes activities under the phrase 'similar arrangements'. Petitioner does not dispute that it accepts money from its members by way of savings and time deposits.

AIT

Learning through Quality Training

C.T.A. EB CASE NO. 289 (CTA Case 6827) December 18, 2007 . . . From said deposits, the members receive interest income from the depository cooperative. Accordingly, the law requires petitioner to withhold the corresponding final tax from said interest income received by its members.

AIT

Learning through Quality Training

Directors Fees
If the director is an employee of the coop: considered as compensation income If the director is not an employee of the coop: treated as professional income subject to creditable withholding tax.

AIT

Learning through Quality Training

RMC 34-2008 on Directors Fees

Subject to creditable withholding tax of 10% or 15% (for gross receipt exceeding P720,000) Withholding tax applies to per diems, allowances and any other form if income payment to the director.

AIT

Learning through Quality Training

Directors Fees, RMC 34-2008

(Subject to Income Tax) Subject to creditable withholding tax of 10% or 15% (for gross receipt exceeding P720,000) Withholding tax applies to per diems, allowances and any other form if income payment to the director.

AIT

Learning through Quality Training

Directors Fees, RMC 34-2008

(Subject to VAT or 3%) Directors of corporations and cooperatives fall under the category of seller of services and therefore liable to pay: 12% VAT (total fees > P1.5M per year) 3% (total fees P1.5M or less per year)

AIT

Learning through Quality Training

Micro-Finance, RR 14-2007

Sec 4. . . All income of Coops which undertake microfinance activities in addition to their purpose except credit Coops and multi-purpose Coops which have one of its business activities as those performed by credit Coops, shall be subject to appropriate taxes under the NIRC.

AIT

Learning through Quality Training

Micro-Finance, RR 14-2007

Sec 5. . . All income of NGOs from microfinance activities and which is not in respect of their registered activities under Sec 30 of the NIRC shall be subject to appropriate taxes under the NIRC.

AIT

Learning through Quality Training

Certificate of Tax Exemption (CTE)

. . . The availment of exemption privileges granted to Coop is not automatic. A Coop needs to secure first a CTE from the BIR to qualify for exemptions.

(BIR Ruling DA 591-2006 dated October 5, 2006)

AIT

Learning through Quality Training

Request for CTE

A Coop filed for request for CTE in 1999 but was not acted upon by the BIR; in 2005 it reapplied for exemption but never received communication from BIR. It was ruled that effective date of tax exemption is from August 11, 1999, date of approval of the Coops Registration Certificate.

(BIR Ruling ECCP-003-06 dated March 30, 2006)

AIT

Learning through Quality Training

Validity of the CTE

SECTION 7, RR 20-2001: Validity Of CTE The CTE shall be valid during such period that the Coop is in good standing as ascertained by the CDA on an annual basis.

AIT

Learning through Quality Training

Annual Information Return

File Annual Information Return Use Form 1702 version (Exempt portion) On or before 15th day of the 4th month after EOY

(BIR Ruling DA 029-2006 dated Feb 02, 2006)

AIT

Learning through Quality Training

Annual Information Return Attachments

Financial Statements Certificate that there has been no change in the By-Laws, Art of Cooperation, activities, sources and disposition of income. Copy of the letter of exemption/ruling A Copy of the CGS
AIT

Learning through Quality Training

Financial Statements
(RR 7-2007)
FS shall include: 1. Balance sheet 2. Income Statement 3. Statement of Changes in Equity 4. Statement of Cash Flows 5. Notes, comprising a summary of significant accounting policies and other explanatory notes 6. Schedules attached to the afore-cited statements

AIT

Learning through Quality Training

On Books of Accounts
(RR 8-2007)
Mandates taxpayers to maintain books and records that would reflect the reconciling items between Financial Statement figures and/or data with those reflected in the filed ITR. (PFRS vs. NIRC)
(RR 8-2007, effective TY 2007)

AIT

Learning through Quality Training

End of presentation
estelitaaguirre@yahoo.com
AIT

Learning through Quality Training