TAXABILITY OF COOPERATIVES

REVENUE REGULATIONS NO. 20-2001 dated November 12, 2001

Regulations Implementing Articles 61 and 62 of RA No. 6938, Otherwise Known as the Cooperative Code of the Philippines, in Relation to RA Nos. 7716, 8241 and 8424, Thereby Amending RMC No. 48-91

SECTION 1. - SCOPE Pursuant to Section 244, in relation to Section 4 of the NIRC of 1997, these regulations are hereby promulgated : (1) to implement the provisions of Articles 61 and 62 of RA No. 6938,

as effectively amended by RA Nos. 7716, 8241 and 8424 granting tax exemptions to cooperatives, and (2) to prescribe the guidelines for the Availment thereof, thereby amending RMC No. 48-91.

SECTION. 2 - DEFINITIONS a) Cooperative means the cooperative duly registered with the CDA or whose registration has been confirmed by the latter, including primary, secondary or tertiary cooperatives

Definition per PD NO. 175

Cooperative shall mean only organizations composed primarily of small producers and consumers who voluntarily joined together to form business enterprises which they themselves own, control and patronize.

Small producer is a self-employed individual who, by himself or with his family, provides the primary labor requirements of his business enterprise or one who earns at least 50% of his gross income from the payment proceeds or income of the labor he provides.

b) Cooperative Development Authority - means the govt agency in charge of the registration and regulation of cooperatives as such, hereinafter referred to as the CDA

c) Registration means the operative act granting juridical personality to a proposed cooperative as evidenced by a Certificate of Registration from CDA

d) Certificate of Tax Exemption means the ruling granting exemption to the cooperative issued by the BIR (This means that cooperatives are not automatically exempt from certain taxes)

e) Income Tax - means corporate/ cooperative Income Tax under the National Revenue Code f) Sales Tax - refers to either the VAT or percentage tax (also referred to as business taxes)

g) Net Surplus/Net Savings - refers to the net amount arising from the operations of the cooperative, belonging to its members, not construed as profit, but as excess of payments made by the members for the loans borrowed

or the goods and services bought from the cooperative which shall be made available to them in the form of interest not to exceed the normal rate of return on investments and patronage refund.

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 reserve 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 (2) years.

Definition per PD NO. 175Share Capital is the money paid or required to be paid by the members for the conduct of the operations of the cooperative Limited Interests to Capital - share capital shall earn only limited interests, the maximum rate of which is to be established by the Dept of Local Govt and Community Devt (now DILG) from time to time.

Patronage Refund - refers to Net Income after the interest on capital has been paid shall be redistributed among the members in proportion to their patronage. Reserve Refund The fund set aside for funding of reserves (statutory and other reserves) established by the cooperative such as Retirement, Mutual Benefit and other funds. This may be in the form of time deposits or other securities which are readily convertible into cash when needed.

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.

SEC.3- EXEMPTION FROM TAXES3.1 Duly registered cooperatives dealing/transacting business with members only shall be exempt from paying the following taxes for which they are directly liable, viz:

a. Income Tax on income from operations; b. VAT under Sec. 109 pars. (r), (s), (t) and (u) of the 1997 Tax Code ; -sale by agricultural cooperatives -sales by electric cooperatives -gross receipts by credit or

- sales by multi-purpose coops

- sales by non-agricultural, non-electric and non-credit cooperatives subject to certain conditions. c. 3% Percentage Tax under Sec. 116 of the Tax Code of 1997;

d. Donors tax on donations to duly accredited charitable, research and educational institutions, and reinvestment to socio-economic projects within the area of operation of the cooperatives; e. Excise tax under the Tax Code;

f. Documentary Stamp Taxes provided however, that the other party to the taxable document or transaction who is not exempt shall be the one directly liable for the tax; and g. Annual RF of P500.00

3.2 Taxability or Exemption of duly registered cooperatives dealing or transacting business with both members and non-members:

I.

For cooperatives with accumulated reserves and undivided net savings of not more than Ten Million Pesos (P10,000,000.00)

a. Exemption from all national internal revenue taxes for which they are directly liable. As enumerated under Sec. 3.1 of these Regulations.

II. For cooperatives with accumulated reserves and undivided net savings of more than Ten Million Pesos (P10,000,000.00)

a. IT exemption for the period of 10 years from the date of CDA registration, provided that, at least 25% of the Net Income of the cooperative is returned to the members in the form of interest and/or patronage refund.

For cooperatives whose exemptions were removed by EO No. 93, the 10-year period shall be reckoned from March 10, 1987 (meaning, tax exemption is valid only until March 10, 1997)

After the lapse of the 10-year period, they shall be subject to IT 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;

The tax base for all cooperatives liable to IT shall be net surplus arising from business transactions with non-members after deducting the amounts for the statutory reserve funds as provided for in the Coop Code and other laws.

b. Exemption from VAT under Sec. 109 (r), (s), (t) and (u), 3% Percentage Tax and Annual Registration Fee c. Subject to all other internal revenue taxes unless otherwise provided by law; and

d. Limited or full deduction from the gross income of donations to duly accredited charitable, research, educational institutions and reinvestment to socioeconomic projects within the area of operation of cooperative.

Notwithstanding the foregoing, all income of the cooperative not related to its main/principal business/es shall be subject to all the appropriate taxes under the Tax Code.

This is applicable to all types of cooperatives, whether dealing purely with members or both members and non-members. In any event, all types of cooperatives are required to register with the BIR.

SEC.4 - LIABILITY OF COOPS TO OTHER INTERNAL REVENUE TAXES Regardless of classification they shall be subject to: a) 20% Final Income Tax (FT) on - interest from any currency bank deposit and yield or

any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines;

b) 7.5% FT on interest derived from a depository bank under the expanded foreign currency deposit system (EFCDS); c) CGT on sales or exchanges of real property classified as capital assets or shares of stock;

d) DST on transactions of cooperatives dealing with nonmembers when the accumulated reserves and undivided net savings of such cooperatives exceed P10M;

e) VAT billed on purchases of goods and services, except the VAT on the (1) importation of agricultural cooperatives 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, and (2) importation by electric cooperatives of machineries and equipment, including spare parts,

which shall be directly used in the generation and distribution of electricity, pursuant to Section 109 (r) and (s) of the Tax Code of 1997 but which are not available locally as certified by the DTI.

All tax-free importations shall not be transferred to any persons until five (5) years, otherwise, the cooperative and the transferee or assignee shall be solidarily liable to pay twice the amount of the tax and/or the duties thereon;

f) All other taxes for which the cooperatives are not otherwise expressly exempted by any law. g) Liability as WH Agents and are required to file WH Tax Returns and remit WH taxes on all income payments that are subject to WH.

COOPERATIVE AS WH AGENT Creditable Expanded WH Taxes (CEWT) on certain expenses or income payments Final Withholding Taxes WH Tax on Compensation

SEC.5. - TAXABILITY OF MEMBERS OR STOCKHOLDERS The exemption of the cooperatives does not extend to their individual members. Thus, member of cooperatives are liable to pay all necessary internal revenue taxes

under the NIRC, including the tax on earnings derived from their capital contribution. Provided, however, that interests received by members of cooperative with accumulated reserves and

undivided net savings greater than P 10M , after the lapse of the 10-year exemption under Sec.32. (II) above, shall no longer be taxable in the hands of such members.

SEC.6. DOCUMENTS TO BE ATTACHED TO THE LETTERAPPLICATION FOR THE ISSUANCE OF TAX EXEMPTION CERTIFICATE

a) Letter-Application signed by the President/Gen. Manager or his authorized representative, to be submitted to the Legal Division of the Rev. Region having jurisdiction over the coops principal place of business

b) DOCUMENTS TO BE ATTACHED: Articles of Cooperation and ByLaws; Certified true copy of Certificate of Registration issued by the CDA;

c) Certified true copy of the Certificate of Confirmation of Registration from the CDA (in the case of Cooperative already existing and previously registered under P.D. 175, P.D. 775, and E.O. 898, before the creation of CDA);

d) Certificate under oath by President/Gen.Mgr whether the Coop is transacting business with members only or with both members and non-members, whichever is applicable;

e) Original copy of the Certificate of Good Standing from CDA; f) Certificate under oath by the Chairman/General Manager (if previously registered as above stated as certified by CDA),

as to the amount of accumulated reserves and undivided net savings, and that at least 25% of the net income is returned to the members in the form of interest and/or patronage refund;

g) Certification under oath of the list of members and the share capital contribution of each member; and h) Latest Financial Statements duly audited by an independent CPA.

SEC.7. VALIDITY OF TAX EXEMPTION CERTIFICATEThe Tax Exemption Certificate shall be valid during such period that the Cooperative is in good standing as ascertained by the CDA on an annual basis.

SEC. 8 ANNUAL RETURN AND DOCUMENTS TO BE FILED WITH THE BIRA copy of the Certificate of Good Standing issued by the CDA to the cooperative shall, together with

the Annual Information Return (for non-taxable cooperative) or IT Return (for taxable cooperative) and F/S, be submitted on or before the 5th day of the 4th month ffg. the close of the taxable year.

SEC.9. VERIFICATION OF ANNUAL INFORMATION RETURN (AIR) or ITR, FINANCIAL STATEMENTS, ATTACHMENTS AND RECORDS

Pursuant to the last paragraph of Section 235 of the Tax Code of 1997, any provision of existing general or special law to the contrary notwithstanding, the books of accounts and other pertinent records, as well as the operations of all cooperatives,

may be examined by the BIR annually for purposes of ascertaining compliance with the conditions under which they have been granted tax exemptions or tax incentives, and their tax liabilities, if any, upon previous consultation with CDA.

SEC. 10. REPEALING CLAUSEAll revenue rulings, regulations and other issuances, including RMC No. 48-91, or parts thereof which are consistent with these Regulations are hereby amended or repealed accordingly.

SEC 11. EFFECTIVITY

These Regulations shall take effect upon approval hereof.

REVENUE MEMORANDUM CIRCULAR NO. 72-2003

Tax implications of Electric Cooperatives registered with the National Electrification Administration and Cooperative Development Authority.

A. Electric Cooperatives (ECs) registered with the National Electrification Administration (NEA) are exempt from: 1. Franchise tax under Section 119 of the Tax Code of 1997 (BIR Ruling No. DA-250- 03 dated July 31, 2003);

2. VAT, on sales relative to the generation and distribution of electricity as well as their importation of machineries and equipment, including spare parts, which shall be directly used in the generation and

distribution of electricity (1997 NIRC as amended) 3. Income taxes for which they are directly liable [P.D. No. 269) 4. All National Government taxes and fees, including franchise, filing, recordation, license or

permit fees or taxes, subject to certain conditions set forth by Presidential Decree No. 269. 5. Three Percent (3%) Percentage Tax under Sec. 116 of the Tax Code of 1997.

B. Electric Cooperatives (ECs) registered with the (CDA). 1. For ECs that do not transact any business with nonmembers or the general public:

a. Franchise taxes under Section 119 of the Tax Code of 1997 (BIR Ruling No. DA-250-03 dated July 31, 2003); b. Income Tax on income from operations;

c. VAT, on sales relative to the generation and distribution of electricity as well as their importation of machineries and equipment, including spare parts, which shall be directly used in the generation

and distribution of electricity [Sec. 109(s) of the Tax Code of 1997]; d. Three Percent (3%) Percentage Tax under Sec. 116 of the Tax Code of 1997;

e. Donor's Tax on donations to duly accredited charitable, research and educational institutions, and reinvestment to socio-economic projects within the area of operation of the ECs;

f. Excise Tax under Title VI of the Tax Code of 1997; g. DST imposed under Title VII of the Tax Code of 1997. Provided, however, that the other party to the taxable document or transaction

who is not exempt shall be the one directly liable for the tax and; h. Annual Registration Fee of P500.00 under Section 236(B) of the Tax Code of 1997.

2. For coops transacting business with both members and non-members: a. if ECs transact business with members, all national internal revenue taxes for which they are directly liable as enumerated under parag B-1;

b If ECs transact business with nonmembers and have an accumulated reserves and undivided net savings of not more than P10M, all national internal revenue taxes for which they are directly liable under parag. B-1 hereof;..

Such ECs shall be exempt from customs duties, advance sales or compensating taxes on their importation of machineries, equipment and spare parts used by them and which are not available locally as certified by the DTI.

All tax-free importations shall not be transferred to any person until after five (5) years, otherwise, the EC and the transferee or assignee shall be solidarily liable to pay twice the amount of the tax and/or duties thereon.

c. If ECs transact business with nonmembers and have an accumulated reserves and undivided net savings of more than P10M, it shall be exempt from the ff. taxes:

i. IT for a period of 10 yrs. from date of registration with the CDA. Provided, that at least 25% of the net income of the EC is returned to the members in the form of interest and/or patronage refund;

ii.

VAT, on sales relative to the generation and distribution of electricity as well as their importation of machineries and equipment, including spare parts, which shall be

directly used in the generation and distribution of electricity [Sec. 109(s) of the Tax Code of 1997]; iii. Annual Registration Fee of P500.00 under Section 236(B) of the Tax Code of 1997; and

iv. Donations to charitable, research and educational institutions and investment to socioeconomic projects within the area of operation of the cooperative may be tax deductible.

i.

But, subject to the ff. taxes: IT after the expiration of the exemption- On the amount allocated for interest on capital; Provided that IT is not consequently imposed on interest individually received by members;

ii. Sales Tax after the expiration of the exemption - On sales to non-members; and iii. All other taxes unless otherwise provided herein.

All ECs under this paragraph, regardless of the amount of accumulated reserves and undivided net savings shall be exempt from payment of taxes on transactions with banks and insurance companies:

Provided, That all sales or services rendered for nonmembers shall be subject to the applicable percentage taxes except sales made by producers, marketing or service coops:

Provided, further, That nothing in this RMC shall preclude the examination of the books of accounts or other accounting records of the EC by duly authorized internal revenue officers for internal revenue tax purposes only,

after previous authorization by the CDA. All ECs, whether it be registered with the NEA or CDA, shall be subject to:

a.

20% final IT on interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements & royalties derived from sources within the Philippines.

b.

c.

7.5% final IT on interest income derived from a depositary bank under the expanded foreign currency deposit system; CGT on sales or exchanges of real property classified as capital assets or shares of stock;

d. Documentary Stamp Taxes on transactions of ECs dealing with non-members when the accumulated reserves and undivided net savings of such cooperatives exceed P10M;

e. VAT billed on purchases of goods and services not exempt. f. All other taxes for which the ECs are not otherwise expressly exempted by any law.

Moreover, all ECs are considered as withholding agents and are required to file withholding tax returns and remit withholding taxes on all income payments that are subject to withholding..

REVENUE REGULATIONS NO. 14-2007

Tax on Non-governmental Organizations (NGOs) and Cooperatives Engaged in Microfinance Activities

SECTION 1. Background The government has recognized the role of microfinance institutions in its poverty alleviation programs, particularly in carrying out the objectives of RA 8425 otherwise known as the Social Reform and Poverty Alleviation Act.

With the increasing number of NGOs and cooperatives engaging in microfinance activities, there is a need to clarify the tax treatment of profits on microfinance activities derived by these entities which enjoy tax exemption under existing laws and regulations.

SECTION 2. Purpose Pursuant to the provisions of Sec. 244 of the NIRC, these Regulations are hereby issued to rationalize the tax exemptions of these entities based on existing

laws and regulations and the relevant tax treatment of the profits derived in relation to their delivery of microfinance services.

SECTION 3. Definition of TermsA. Microfinance - is a credit and savings mobilization program exclusively intended for the poor to improve the asset base of households and expand the access to savings of the poor.

It involves the use of viable alternative credit schemes and savings programs including the: extension of small loans Simplified loan application procedures group character loans

collateral-free arrangements alternative loan repayments minimum requirements for savings Small denominated savers instruments;

consistent with the provisions of RA 8425, the maximum individual loan amount provided for microfinance loans is P150,000, subject to periodic determination of the DTI to reflect economic changes.

B. Cooperative - refers to associations duly registered with the CDA, composed of at least (15) persons, majority of which are poor, having a common bond of interest, who voluntarily join together to achieve a lawful, common social & economic end.

It is organized by the members who equitably contribute the required share capital and accept a fair share of the risks and benefits of their undertaking in accordance with the universally accepted corporate principles and practices.

C. Credit cooperative - is a type of cooperative which provides thrift among its members and creates funds in order to grant loan for productive and provident purposes.

D. Multipurpose Cooperative is a type of cooperative which combines two (2) or more of the business activities of the different types of cooperatives.

E. Accumulated Reserves commonly referred to as the General Reserve Fund, refers to the amount of accrued sum of money annually retained and deducted

from the net surplus which is not intended for allocation and distribution to the members, usually deposited in the bank for the protection of and stability of the cooperative.

F. Undivided Net Savings refers to the amount arising from net surplus or any portion thereof which the Board of Directors or 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, reserve 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.

G. Non Government Organizations (NGOs)Refers to duly registered nonstock, nonprofit organizations focusing on the upliftment of the basic or disadvantaged sectors of society by providing advocacy, training, community organizing, research, access to resources, and other similar activities.

SECTION 4. Tax Treatment of Microfinance Services Rendered by Cooperatives

Consistent with the provisions of Revenue Regulations No. 20-2001, the tax treatment for credit cooperatives on transactions related to its microfinance activities is as follows -

A. Duly registered credit cooperatives dealing/transacting with members only shall be exempt from paying the following taxes for which they are directly liable:

a. b. c.

Income tax from operations, Value-added tax (VAT), 3% percentage tax under Section 116 of the Tax Code of 1997, and

d.

e.

Documentary stamp tax (DST) imposed under Title VII of the Tax Code of 1997, as amended, provided, however, that the other party to the taxable document/transaction who is not exempt shall be the one directly liable for the tax. Annual Registration Fee of P500.00

B. Duly registered cooperatives dealing/transacting business with both members and nonmembers

a.

i.

For cooperatives with accumulated reserves and undivided net savings of not more than Ten Million Pesos (P10,000.000.00) exemption from taxes for which they are directly liable, as enumerated in paragraph A of this Section.

b. For credit cooperatives with accumulated reserves and undivided net savings of more than Ten Million Pesos (P10,000.000.00)

i.

Exemption from income tax for a period of 10 years from the date of registration with the CDA, provided, that at least twenty five percent of the net income of the cooperative is returned to the members in the form of interest and/or patronage fund.

For cooperatives whose exemption were removed by Executive Order No. 93, the ten year period shall be reckoned from March 10, 1987 (i.e., the tax exemption is valid only up to March 10, 1997)

After the lapse of such ten year period, they shall be 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.

The tax base for credit cooperatives liable to income tax shall be the net surplus arising from business transactions with nonmembers, including those arising from all microfinance activities, after deducting the amounts from the statutory reserve funds as provided for in the Cooperative Code and other laws.

ii.

Exemption from VAT under Section 109(M) and 3% tax under Section 116, both of the Tax Code, as amended. iii. Subject to all other internal revenue taxes unless otherwise provided by law.

Notwithstanding the foregoing, all income of cooperatives which undertake microfinance activities in addition to their registered purpose except credit cooperatives and multi-purpose cooperatives which have one of its business activities as those performed by credit cooperatives,

shall be subject to appropriate taxes under the Tax Code of 1997, as amended. This is applicable to all cooperatives, whether dealing purely with members or both members and non-members.

Moreover, all cooperatives, regardless of classification, are considered as withholding agents and are required to file withholding tax returns and remit withholding taxes on all income payments that are subject to withholding.

SECTION 5. Tax Treatment of Microfinance Services Rendered by NGOs

All NGOs falling under enumeration of Section 30 of Tax Code of 1997, as amended, exempt from income taxes, respect of income received them as such.

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However, income of such NGOs from microfinance activities, and which are not in respect of their registered activities covered by Section 30 of the Tax Code of 1997, as amended, regardless of the disposition made of such income, shall be subject to tax under the Tax Code of 1997, as amended.

Similarly, non-stock, non-profit NGOs, whether or not engaged in microfinance activities, are still also required to file withholding tax returns and remit withholding taxes on all income payments that are subject to withholding as specified in Revenue Memorandum Circular No. 762003.

SECTION 6. Repealing Clause These Regulations shall be read in consonance with Revenue Regulations No. 20-2001 and Revenue Memorandum Circular No. 76-2003.

All revenue rulings, issuances or parts thereof which are inconsistent with these Regulations insofar as microfinance activities of cooperatives and NGOs are concerned are hereby amended or repealed accordingly.

SECTION 7. EffectivityThese Regulations shall take effect fifteen (15) days after publication in the Official Gazette or newspaper of general circulation, whichever comes first.

UPDATES HOUSE OF REPRESENTATIVES BILL NO. HB00513 FULL TITLE : AN ACT AMENDING THE COOPERATIVE CODE OF THE PHILIPPINES TO BE KNOWN AS THE "PHILIPPINE COOPERATIVE CODE OF 2007" SHORT TITLE : "Philippine Cooperative Code of 2007" ABSTRACT : Philippine Cooperative Code of 2004".

The measure seeks to amend the Cooperative Code to make the organization of cooperatives more attractive and to provide a fertile social and economic environment for cooperatives to succeed in their endeavors. BY CONG. DOMOGAN, MAURICIO G. DATE FILED ON 2007-07-02 CO-AUTHORS: ZIALCITA, EDUARDO C.

REFERRAL ON 2007-07-30 TO THE COMMITTEE ON COOPERATIVES DEVELOPMENT, SECONDARILY REFERRED TO THE COMMITTEE(S) ON REVISION OF LAWS SIGNIFICANCE: NATIONAL SUBJECT: COOPERATIVES DATEREAD: & nbsp 2007-07-30 MOTHER BILL : &nbsp HB04312 COSUBSTITUTEDBILLS: &nbspHB00081, HB00316, HB00645, HB01256, HB02874, HB03207, HB03979

SENATE OF THE PHILIPPINES 14th Congress Senate Bill No. 2264PHILIPPINE COOPERATIVE CODE OF 2008 Filed on May 7, 2008 by Biazon, Rodolfo G., Ejercito-Estrada, Jinggoy P., Pimentel Jr., Aquilino Q., Zubiri, Juan Miguel F., Villar, Manny, Lapid, Manuel "Lito" M.

Long title AN ACT AMENDING THE COOPERATIVE CODE OF THE PHILIPPINES TO BE KNOWN AS THE PHILIPPINE COOPERATIVE CODE OF 2008 Scope - National Legislative status Conference Committee Report Approved by Senate (11/26/2008)