The Taxation Updates for Coops

“Learning through Quality Training”AIT

Dean Estelita C. AguirreResource Person

Taxation Updates ForCOOPERATIVES


Objectives of the Seminar

To review: > the tax exemption provisions of COOP

Code vis-à-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


Presentation OutlinePart I Review

1) Legal Bases of Exemptions2) Classification of Coops3) Tax Exemption/taxability of Coops4) Taxability of COOP Members & Directors

Part II Recent Development1) CTA Decisions: Final Tax on Interest2) RMC 34-2008 on Director’s fees3) RR14-2007 on Microfinancing3) BIR ruling on CTE


Legal Bases of Exemptions


Legal Bases of Exemptions

1. Cooperative Code of the Philippines Article 61Article 62

2. Bureau of Internal RevenueSection 109 of NIRCRR No. 20-2001

3. Local Government Code of 1991Section 133 Section 234


Article 61 and 62, RA 6938 apply to

Art 61 Coops transacting with members only

Art 62(1) Coops transacting with members andnon-members with Reserves of P10M & below

Art 62(2) Coops transacting with members andnon-members with Reserves of over P10M


Local Government Code

Section 133(n) exempts all duly registeredCOOPs from taxes, fees and charges

Section 234(d) exempts from real property taxes all real property owned by duly registered COOPs


Local Government Code

CDA Memo Circular 93-005 clarifies:

Starting Jan 1, 1992, CDA-registered Coops shall exempt from local business taxes andcharges.

RA 7160 reiterated the exemption from local business taxes under PD 231 and expanded the exemption to include feesand charges.


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. Donor’s tax to duly accredited charitable/

research/educational inst &reinvestmentto 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


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


Classification of Coops


COOPs as Income Taxpayers

Kinds of Income Taxpayers

1. Individuals receiving compensation income

2. Business and professional income earners2.1 individuals2.2 corporations/associations

3. Passive Income Earners COOPs

4. Exempt Income Earners COOPs


Coops as Business Taxpayers

Kinds of Business Taxpayers

1. VAT Taxpayers1.1 12% VAT taxpayers Electric COOPs1.2 0% VAT taxpayers

2. NON-VAT Taxpayers Other COOPs2.2 Percentage taxpayers 2.3 Exempt taxpayers (from VAT/%Tax)


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


Exemption of COOPsdepends 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


COOPs covered by exemption

Coops dealing with members only, regardless ofreserves and years in existence.

Coops dealing with members and non-memberswith accumulated reserves of not morethan P10M, regardless of years in existence

Coops dealing with members and non-memberswith accumulated reserves of more thanP10M, during the first 10 years of existence.


Income and VATExemptions of COOPs


Coops transacting with members onlyArt 61

*Regardless of Reserve Surplus amount.

*Exempted from national and local taxes

*Period of exemption is continuing


COOPs transacting with non-membersArt 62 (1)

*With Reserve Funds of P10M and below

*Exempted on transactions with members andand non-members

*Period of Exemption is continuing


COOPs transacting w/ non-membersArt 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


Sample CTE, excerpt:

“. . . . . you are exempt from the ordinaryincome 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 62of the Coop Code or until Feb 22, 2005. . . “

(BIR Ruling ECCP-006-2006 May 25, 2006)



“ . . . . Thereafter, your income tax exemptionshall be limited to business transactions w/ members only. Provided further, that incometax exemption is still applicable to business transactions with non-members withreserves/undivided net savings of notmore than P10M. . . . . . .”



Sample CTE, excerpt

“ After the lapse of 10 years, subject to income tax at the full rate on the amountallocated for interests on capital, provided that the same is not consequently imposedon interest individually received by members;. . . “




“Tax base shall be the net surplus arising from business transactions with non-members after deducting the amounts for the statutory reserve funds.”



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.


Electric Cooperative

Income Tax :NEA-registered - Exempt w/in 30 yearsCDA-registered -

dealing w/ members – Exemptdealing 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


Sales by Agricultural Cooperatives(Section 109 L)

Exempt from VAT Conditions:

1. duly registered with CDA 2. in good standing with CDA


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 exclusivelyin the production and/or processing of their produce


Sales by Agriculture Coop

Agri coop-producer - sale of agri- nonfoodto 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


Credit/Multi-Purpose CooperativesSection 109 (M)

Exempt from VAT

Conditions: 1. duly registered with CDA2. in good standing with CDA

Note: RA 9337 deleted the phrase “whose lendingoperation is limited to members”.


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


Non-elec,non-agri,non-credit COOPsSection 109 (N)

Exempt from VAT

Conditions: 1. duly registered with CDA2. in good standing with CDA

3. share capital contributionof each member does notexceed P15,000.

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


Other Tax Exemptions of COOPs

3% percentage tax under Sec 116 of NIRC

Donor’s tax to duly accredited charitable/resarch/educ inst & reinvestment to socio projects withinthe area of COOPs;

Excise tax under Title VI of the NIRC;

DST (the party who is not exempt pays);

Registration fee of P500.00


Taxes due from Coops


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 fromdate of registration.


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 dealingwith members or both members andnon-members.


Interest on bank deposits of COOPs

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

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


Sale or exchanges of Real Property

(BIR Ruling ECCP-003-2006)

On sale of RP-capital assets:

6%CGT +1.5% DST on selling priceor fair market value whichever is higher.


Sale of Shares of stocks

(BIR Ruling ECCP-003-2006)

On sale of shares of stocks: 5% on first P100,000 net gain10% on the excess over P100,000

net gain

1.5% on the gross selling price if listed and traded in the Phil Stock Exchange


12% VAT on Electric COOPs

All electric COOPs, whether CDA orNEA-registered are liable to pay the12% VAT, eff Nov 1, 2005.


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 absentany showing that the said seller is exempt fromtax, 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)


TAXABILITYof

Members and Directorsof

COOPERATIVES


Members of Cooperatives

The exemption of the Coops does not extend to the individualmembers.

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


NS Distribution: RA 6938

Reserve Fund – at least 10%

Education/Training Fund, not over 10%

Optional Fund, not over 10%

Interest/Patronage refunds 70%

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


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%)



Net Surplus to members(Patronage Refunds)

Not Subject to Income Tax

Not subject to VAT

No need to declare in ITR



Net Surplus Distributed to Members(Interest on member’s share capital)

Subject to Income Tax

Not Subject to Withholding Tax

Not subject to VAT

To be declared in Income Tax Return



Interest on deposits

Not subject to withholding.

Include in other taxable income inthe income tax return.

Subject to income tax under Section24(A) of the NIRC

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

(Reversed by the Court of Tax Appeal)


No DST-Member’s Share Certificate

“Coop member’s contribution, beingentirely different in nature and insubstance from corporate shares of stocks, not subject to DST under Section 174.”

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


Interest on bank deposits of Coop Employees’ Retirement Plan

Exempt from 20% FWT.

(BIR Ruling DA 259 dated April 12, 2006)


Recent Development


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

Dumaguete Cathedral Credit Coop petitioner, vs. CIR, respondent.

“Petitioner argues that it is not a bankinginstitution, thus, the interests earned by itsmembers from their savings and time depositswith the cooperative are not subject towithholding tax. . . .”


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 fromany currency bank deposit and yield or any othermonetary benefit from deposit substitutes and fromtrust funds and similar arrangements.

Petitioner's conduct of business constitutesactivities under "similar arrangements" which is taxable under Sec 24(B)(1) of the NIRC.


C.T.A. EB CASE NO. 289 (CTA Case 6827)December 18, 2007

“. . . it is clear that petitioner's conduct of businessconstitutes activities under the phrase 'similar arrangements'. Petitioner does not dispute thatit accepts money from its members by way of savings and time deposits….


C.T.A. EB CASE NO. 289 (CTA Case 6827)December 18, 2007

“. . . From said deposits, the members receiveinterest income from the depository cooperative. Accordingly, the law requires petitioner to withholdthe corresponding final tax from said interest incomereceived by its members.”


Director’s Fees

If the director is an employee of thecoop: considered as compensation income

If the director is not an employee of the coop: treated as professional incomesubject to creditable withholding tax.


RMC 34-2008 on Director’s Fees

Subject to creditable withholding tax of 10% or15% (for gross receipt exceeding P720,000)

Withholding tax applies to per diems, allowancesand any other form if income payment tothe director.


Director’s Fees, RMC 34-2008(Subject to Income Tax)

Subject to creditable withholding tax of 10% or15% (for gross receipt exceeding P720,000)

Withholding tax applies to per diems, allowancesand any other form if income payment tothe director.


Director’s Fees, RMC 34-2008(Subject to VAT or 3%)

Directors of corporations and cooperatives fall under the category of seller of services andtherefore liable to pay:

12% VAT (total fees > P1.5M per year)

3% (total fees P1.5M or less per year)


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-purposeCoops which have one of its business activitiesas those performed by credit Coops, shall besubject to appropriate taxes under the NIRC.


Micro-Finance, RR 14-2007

Sec 5. . . All income of NGOs from microfinance activities and which is not in respect of theirregistered activities under Sec 30 of the NIRCshall be subject to appropriate taxes under theNIRC.


Certificate of Tax Exemption (CTE)

. . . The availment of exemption privilegesgranted to Coop is not automatic. A Coopneeds to secure first a CTE from the BIRto qualify for exemptions.

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


Request for CTE

A Coop filed for request for CTE in 1999but was not acted upon by the BIR; in 2005it reapplied for exemption but never receivedcommunication from BIR. It was ruled thateffective date of tax exemption is from August 11, 1999, date of approval of theCoop’s Registration Certificate.

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


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.


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)


Financial Statements

Certificate that there has been no changein the By-Laws, Art of Cooperation, activities, sources and disposition of income.

Copy of the letter of exemption/ruling

A Copy of the CGS

Annual Information ReturnAttachments


Financial Statements(RR 7-2007)

FS shall include:1. Balance sheet2. Income Statement3. Statement of Changes in Equity4. Statement of Cash Flows5. Notes, comprising a summary of significant

accounting policies and other explanatorynotes

6. Schedules attached to the afore-cited statements


On Books of Accounts (RR 8-2007)

Mandates taxpayers to maintain books andrecords that would reflect the reconciling itemsbetween Financial Statement figures and/or data with those reflected in the filed ITR. (PFRS vs. NIRC)

(RR 8-2007, effective TY 2007)


End of presentation…

[email protected]

The Taxation Updates for Coops

Documents

local government

bir ruling

bir ruling

creditable

withholding

income tax

business constitutes

local business