P&A's Let's Talk Tax column appears in The Economy section of BusinessWorld every Tuesday.

Please find below the September 19, 2006 article on “Taxation of cooperatives” by tax manager Recel
Cachuela. For comments and inquiries, please e-mail the author at Recel.P.Cachuela@pna.ph or call
(632)886-5511.
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LET’S TALK TAX

RECEL P. CACHUELA

Taxation of cooperatives

The Cooperative Code of the Philippines (Republic Act No. 6938) declares the policy of
the State to foster the creation and growth of cooperative as a practical vehicle for
promoting self-reliance and harnessing people power towards the attainment of economic
development and social justice.

To encourage their formation and organization, cooperatives were granted tax incentives
under the Cooperative Code. The incentives vary depending on whether the cooperative
does business exclusively with members or deals with non-members.

Cooperatives dealing exclusively with members are not subject to any government taxes
or fees imposed under the internal revenue laws and other tax laws. For national taxes,
the tax exemptions, as clarified under Revenue Regulations (“RR”) No. 20-01, include
the following:

a. Income tax on income from operations

b. Value-added tax, subject to certain conditions
c. 3% percentage tax
d. Donor's tax subject to certain limitations
e. Excise tax
f. Documentary stamp tax (DST)
g. Annual registration fee of P500.00

They are also exempt from local taxes, except service charges or rentals for the use of
property and equipment or public utilities owned by local government units, as confirmed
through various rulings issued by the Bureau of Local Government Finance.
For cooperatives dealing with both members and non-members, the taxability of the
transactions depends on whether or not the accumulated reserves and undivided net
savings (ARUNS) exceeds P10 million. If the ARUNS is within the P10 million
threshold, the cooperative enjoys the same incentives as cooperatives dealing with
members only.

Those with ARUNS exceeding the P10 million threshold are subject to income tax on
transactions with non-members after the lapse of 10 years from the date of registration
with the CDA. They are, likewise, subject to donor’s tax, DST, excise tax and local
taxes. RR No. 20-01 further clarified that the income of cooperatives, regardless of
classification, from transactions not related to their principal operation are subject to the
appropriate taxes under the Tax Code.

Despite the clear exemptions of cooperatives from taxes, many cooperatives are still
swamped with deficiency tax assessments from the Bureau of Internal Revenue. Should
these cooperatives be made liable for taxes even if the exemption is clearly provided in
the law? Is the failure to comply with administrative requirement sufficient basis for
divesting cooperatives of the tax exemption privileges?

For example, RR No. 20-01 requires the cooperatives to apply for Certificate of
Exemption (COE) through the Legal Services of the Revenue Region having jurisdiction
over the cooperatives’ principal place of business. This is not, however, imposed as a
requisite for the availment of the tax exemption. Neither does the law require a
Certificate of Exemption as a condition for the enjoyment of the tax exemption
privileges. Thus, cooperatives could not be denied the incentives provided in the law
merely for failure to comply with the administrative requirement.

Another pressing issue affecting particularly savings and credit cooperative (SSC) is its
supposed obligation, as withholding agent, to withhold 20% final tax on the interest
expenses paid to member-depositors. In the February 2006 draft Manual of Rules and
Regulations for Cooperatives with Savings and Credit Services in the Philippines, it is
provided that SSCs are required to withhold and remit 20% final tax on interest income
earned by the member-depositors. It is to be noted that the Tax Code requires a final tax
of 20% only upon the amount of interest on currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar arrangement.
Considering that a cooperative is not a bank, the interest derived by the members should
be exempt from final withholding tax.

These are only some of the many challenges that the cooperatives face in terms of
complying with their tax obligations. If the cooperatives are to be considered as vehicles
for promoting self-reliance aimed towards the attainment of economic development and
social justice, these should be accorded the benefits clearly intended by the law. In fact,
every government agency, including the revenue tax authority, is expected to ensure that
cooperatives develop into viable and responsive economic enterprises free from any
conditions that may infringe upon their autonomy or organizational integrity.
(The author is a tax manager at the Davao branch of Punongbayan & Araullo, member
of Grant Thornton International. For comments and inquiries, please e-mail
Recel.P.Cachuela@pna.ph).