Tax treatment of cooperatives

The spirit underlying the formation of cooperatives is universal to all types of human groupings — from families to clans and tribes to society — which is to seek a common goal for the common good.

This rationale permeates even the Papal encyclical, Caritas in Veritate, of Pope Benedict XVI which reads, in part, that: “Another important consideration is the common good. To love someone is to desire that person’s good and to take effective steps to secure it. Besides the good of the individual, there is a good that is linked to living in society: the common good. It is the good of ‘all of us’, made up of individuals, families and intermediate groups who together constitute society[4]. It is a good that is sought not for its own sake, but for the people who belong to the social community and who can only really and effectively pursue their good within it. To desire the common good and strive towards it is a requirement of justice and charity.”

Our very own 1987 Philippine Constitution also recognizes the critical role of cooperatives when it mandates in Section 15 of Article XVII thereof the creation by Congress of an agency that will promote cooperatives as instruments for social justice and economic development.

Considering the critical role of cooperatives in national growth and economic progress, the latest law governing them, namely: Republic Act (RA) No. 9520, or the Philippine Cooperative Code of 2008 (PCC 2008), enhanced their tax incentives, as compared to the provisions provided by the earlier law, RA 6938 or the Cooperative Code of the Philippines (CCP).

This article will particularly dwell on cooperatives’ tax treatment under PCC 2008.

The current law distinguishes between cooperatives which transact business only with their members and those which deal with both members and nonmembers.

For the first type of cooperatives — and this is where the tax enhancement of PCC 2008 over the CCP comes in — they shall not be subject to any tax or fee imposed under the internal revenue laws and other tax laws such as income tax, value-added tax (VAT), percentage tax, donors’ tax, excise tax, documentary stamp tax, annual registration fee of P500 as well as taxes on transactions with banks and insurance companies, including but not limited to the 20% final withholding tax (FWT) on interest deposits and 7.5% FWT on interest income derived from the expanded foreign currency deposit system.

For the second type, if their accumulated reserves and undivided net savings (ARUNS) do not exceed P10 million, then, regardless if these cooperatives also transact business with nonmembers, the same tax exemption status applies.

Now, if the ARUNS exceed P10 million, only transactions with members are tax-exempt, hence, those with nonmembers shall be taxable.

On the whole, however, income of all cooperatives that are unrelated to their main business/es under their Articles of Cooperation (AoC) shall be subject to all taxes under the Tax Code that are applicable, like capital gains tax on the sale of shares or real property as well as withholding tax on compensation and other income payments.

To avail of tax-exempt status, cooperatives must, first and foremost, be registered with the CDA and must hold a BIR Certificate of Tax Exemption (CTE). In securing a CTE, a letter of application must be filed with the BIR Revenue District Office which has jurisdiction over the principal place of business of the cooperative. The letter should be supported by certified true copies of the Certificate of Registration (CoR) with the CDA under the PCC 2008, AoC and By-Laws, current Certificate of Good Standing from the CDA; and copy of the BIR CoR which should be duly-updated. The CTE is valid for five years and renewable within two months before its expiration date. Timing is a critical factor because if the cooperative does not apply for a CTE within 60 days from the date of issuance of its CoR by the CDA, the late applicants will be subject to internal revenue taxes prior to the issuance of the CTE.

Based on the transitory provisions of PCC 2008, cooperatives registered with the CDA by the CCP are deemed registered under this new law and will be issued a new CoR, provided that within one year from the effectivity date of the PCC 2008 (i.e., April 6, 2009), they shall submit a copy of their CoR, AoC, By-Laws and latest audited financial statements to the CDA. This deadline fell on April 6 last year.

However, the Joint Rules implementing the latest cooperative law took effect only on June 16, 2010, per Revenue Memorandum Order (RMO) No. 76-2010, dated Sept. 27 that same year.

So, when is exactly the deadline here? I guess this needs a joint clarificatory ruling from the Finance department, BIR and the CDA.

Finally, one unique tax item on cooperatives is the legal requirement for prior CDA authorization before BIR can subject them to tax audit or investigation. Thus, a cooperative under tax audit must require the presentation of letters of authority (LoA) from both the BIR and the CDA before agreeing to open its books to the revenue examiner.

In interpreting this obvious legal encroachment on its exclusive authority to assess, audit and investigate taxpayers under the Tax Code, the BIR issued Revenue Memorandum Circular No. 19-2010 on March 5, 2010, providing a cutoff period for this dual LoA prerequisite, i.e., beyond March 22, 2009.

This second date which marks the period of coverage under the current law is inconsistent with the other date cited by the BIR under RMO 76-2010, which is April 6, 2010.

Given the injurious consequence to the cooperatives that will fail to observe these requirements under the transitory provisions of PCC 2008, there is a dire need to address this issue too in the joint clarificatory ruling which I raised in the preceding paragraph.

If I may suggest a lead, the law provides that PCC 2008 takes effect 15 days from its publication in a newspaper of general circulation.

The author is a director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers. Readers may send feedback to catherine.t.manahan@ph.pwc.com.

Views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from such article; the author will be personally liable for any consequent damages or other liabilities. –Catherine T. Manahan, Businessworld