Taxation For Cooperatives

1. “Learning through Quality Training”
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Dean Estelita C. Aguirre
Resource Person
Taxation Updates For
COOPERATIVES

2. “Learning through Quality Training”
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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

3. “Learning through Quality Training”
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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 Director’s fees
3) RR14-2007 on Microfinancing
3) BIR ruling on CTE

4. “Learning through Quality Training”
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Legal Bases of Exemptions

5. “Learning through Quality Training”
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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

6. “Learning through Quality Training”
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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

7. “Learning through Quality Training”
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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

8. “Learning through Quality Training”
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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.

9. “Learning through Quality Training”
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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 &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

10. “Learning through Quality Training”
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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

11. “Learning through Quality Training”
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Classification of Coops

12. “Learning through Quality Training”
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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 COOPs
4. Exempt Income Earners COOPs

13. “Learning through Quality Training”
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Coops as Business Taxpayers
Kinds of Business Taxpayers
1. VAT Taxpayers
1.1 12% VAT taxpayers Electric COOPs
1.2 0% VAT taxpayers
2. NON-VAT Taxpayers Other COOPs
2.2 Percentage taxpayers
2.3 Exempt taxpayers (from VAT/%Tax)

14. “Learning through Quality Training”
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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

15. “Learning through Quality Training”
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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

16. “Learning through Quality Training”
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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.

17. “Learning through Quality Training”
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Income and VAT
Exemptions of COOPs

18. “Learning through Quality Training”
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Coops transacting with members only
Art 61
*Regardless of Reserve Surplus amount.
*Exempted from national and local taxes
*Period of exemption is continuing

19. “Learning through Quality Training”
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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

20. “Learning through Quality Training”
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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

21. “Learning through Quality Training”
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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)

22. “Learning through Quality Training”
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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)

23. “Learning through Quality Training”
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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)

24. “Learning through Quality Training”
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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)

25. “Learning through Quality Training”
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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.

26. “Learning through Quality Training”
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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

27. “Learning through Quality Training”
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Sales by Agricultural Cooperatives
(Section 109 L)
Exempt from VAT
Conditions:
1. duly registered with CDA
2. in good standing with CDA

28. “Learning through Quality Training”
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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

29. “Learning through Quality Training”
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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

30. “Learning through Quality Training”
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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”.

31. “Learning through Quality Training”
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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

32. “Learning through Quality Training”
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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)

33. “Learning through Quality Training”
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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 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

34. “Learning through Quality Training”
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Taxes due from Coops

35. “Learning through Quality Training”
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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.

36. “Learning through Quality Training”
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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.

37. “Learning through Quality Training”
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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.)

38. “Learning through Quality Training”
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Sale or exchanges of Real Property
(BIR Ruling ECCP-003-2006)
On sale of RP-capital assets:
6%CGT +1.5% DST on selling price
or fair market value whichever is higher.

39. “Learning through Quality Training”
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Sale of Shares of stocks
(BIR Ruling ECCP-003-2006)
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

40. “Learning through Quality Training”
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12% VAT on Electric COOPs
All electric COOPs, whether CDA or
NEA-registered are liable to pay the
12% VAT, eff Nov 1, 2005.

41. “Learning through Quality Training”
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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)

42. “Learning through Quality Training”
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TAXABILITY
of
Members and Directors
of
COOPERATIVES

43. “Learning through Quality Training”
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Members of Cooperatives
The exemption of the Coops
does not extend to the individual
members.
(BIR Ruling ECCP-003-2006 dated March 30, 2006)

44. “Learning through Quality Training”
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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)

45. “Learning through Quality Training”
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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)

46. “Learning through Quality Training”
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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)

47. “Learning through Quality Training”
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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
(BIR Ruling DA 075-05, dated March 9, 2005)

48. “Learning through Quality Training”
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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)

49. “Learning through Quality Training”
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No DST-Member’s Share Certificate
“Coop member’s 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)

50. “Learning through Quality Training”
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Interest on bank deposits of Coop
Employees’ Retirement Plan
Exempt from 20% FWT.
(BIR Ruling DA 259 dated April 12, 2006)

51. “Learning through Quality Training”
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Recent Development

52. “Learning through Quality Training”
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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. . . .”

53. “Learning through Quality Training”
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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.

54. “Learning through Quality Training”
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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….

55. “Learning through Quality Training”
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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.”

56. “Learning through Quality Training”
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Director’s 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.

57. “Learning through Quality Training”
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RMC 34-2008 on Director’s 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.

58. “Learning through Quality Training”
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Director’s 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.

59. “Learning through Quality Training”
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Director’s 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)

60. “Learning through Quality Training”
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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.

61. “Learning through Quality Training”
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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.

62. “Learning through Quality Training”
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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)

63. “Learning through Quality Training”
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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
Coop’s Registration Certificate.
(BIR Ruling ECCP-003-06 dated March 30, 2006)

64. “Learning through Quality Training”
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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.

65. “Learning through Quality Training”
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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)

66. “Learning through Quality Training”
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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
Annual Information Return
Attachments

67. “Learning through Quality Training”
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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

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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)

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End of
presentation…
estelitaaguirre@yahoo.com