Supreme Court exempts co-ops from 20% withholding tax

MANILA, Philippines – Members of credit cooperatives are now exempted from the payment of the 20-percent withholding tax, the Supreme Court has ruled.

In a 16-page decision penned by Associate Justice Mariano del Castillo, the Second Division of the High Court reversed a ruling of the Court of Tax Appeals in December 2007 ordering the Dumaguete Cathedral Credit Cooperative (DCCCO) to pay over P2.6 million in unpaid withholding taxes on interest from savings and time deposits
of its members for the taxable years 1999 and 2000, as well as delinquency interest of 20 percent per annum.

The SC also effectively nullified the pre-assessment notice on tax deficiency against DCCCO issued by the regional office of the Bureau of Internal Revenue (BIR) in Bacolod City.

The High Court explained that cooperatives are not required to withhold taxes on interest from savings and time deposits of their members as declared by the country’s major tax collecting agency in BIR Ruling 551-888 promulgated on Nov. 16, 1988.

It stressed that the CTA erred in ruling that the BIR ruling was based on the premise that the deposits were placed by cooperative members in the bank and that such ruling does not apply when the deposits are maintained in the cooperative.

“There is nothing in the ruling to suggest that it applies only when deposits are maintained in a bank. Rather, the ruling clearly states, without any qualification, that since interest from any Philippine currency bank deposit and yield or any other monetary benefit from deposit substitutes are paid by banks, cooperatives are not required to withhold the corresponding tax on the interest from savings and time deposits of their members,” the High Court said.

The High Court said this interpretation was affirmed by the BIR in its ruling dated Oct. 5, 2006, which was issued upon the request of the cooperatives for a “confirmatory” ruling on several issues, among which is the alleged exemption of interest income on members’ deposits from the 20-percent final withholding tax.

Likewise, the SC held that members of cooperatives – like DCCCO which is a credit cooperative duly registered with the Cooperative Development Authority – deserve a preferential tax treatment pursuant to RA 6938 as amended by RA 9520 (Cooperative Code of the Philippines).

The SC noted that under Article 2 of RA 6938, “it is a declared policy of the State to foster the creation and growth of cooperatives as practical vehicle for promoting self-reliance and harnessing people power towards the attainment of economic development and social justice.”

“Thus, to encourage the formation of cooperatives and to create an atmosphere conducive to their growth and development, the State extends all forms of assistance to them, one of which is providing cooperatives a preferential tax treatment,” the High Court said.

The SC said cooperatives deserve a preferential tax treatment because of the vital role they play in the attainment of economic development and social justice.

“Thus, although taxes are the lifeblood of the government, the State’s power to tax must give way to foster the creation and growth of cooperatives,” the SC said.

The SC stressed that this withholding tax exemption on cooperatives under Article 126 of RA 6938 extends to their members. –Edu Punay (The Philippine Star)