Rules on Tax Exemption for Cooperatives

Legal basis, policy, and construction rules

The Joint Rules and Regulations are promulgated pursuant to Sections 4 and 244 of Republic Act No. 8424 (NIRC of 1997, as amended) and Article 144 of Republic Act No. 9520 to implement Articles 60 and 61 of Republic Act No. 9520 on tax exemption for cooperatives.
The provisions are construed to further the declared policy, concepts, and principles under Articles 2, 3, and 4 of Republic Act No. 9520, without prejudice to Section 4 of the NIRC, as amended.
In case of conflict or ambiguity arising in implementation, or doubt as to meaning, the rules must be resolved and construed liberally in favor of cooperatives and their members as provided in Article 142 of Republic Act No. 9520.

Definitions and key terms established

“Accumulated Reserves” means the accumulated amount annually deducted from net surplus, which shall be less than 50% for the first five years of operation after registration and at least 10% thereafter, intended for protection and stability and commonly referred to as the Reserve Fund.
“Bureau of Internal Revenue” (BIR) refers to the government agency entrusted with assessing and collecting national internal revenue taxes and enforcing related forfeitures, penalties, and fines.
“Business Transaction” refers to any business activity or livelihood engaged in by the cooperative where the cooperative generates savings.
“Certificate of Good Standing” refers to the certificate issued annually by the CDA to cooperatives that comply with CDA Memorandum Circular No. 2008-03 and subsequent amendments; it is an essential requirement for the grant of the Certificate of Tax Exemption/Ruling.
“Certificate of Tax Exemption/Ruling” refers to the certificate/ruling issued by the BIR granting exemption to a cooperative, valid for five (5) years from the date of issue.
“Cooperative” refers to an autonomous and duly registered association of persons with a common bond of interest that voluntarily joins to achieve social, economic, and cultural needs through equitable capital contributions, patronizing products and services, and fair share of risks and benefits under universally accepted cooperative principles.
“Cooperative Development Authority” (CDA) refers to the government agency created under Republic Act No. 6939 that registers, regulates, and develops cooperatives.
“Interest on Share Capital” refers to interest earned as paid-up to capitalization, based on average share capital contribution computed per month against a board-set amount for interest on share capital.
“Patronage Refund” refers to the refund/return to members of net savings generated from cooperative operations.
“Registration” refers to the operative act granting juridical personality evidenced by a Certificate of Registration issued by the CDA.
“Transaction with members” refers to cooperative activity providing goods and services to members generating net savings/surplus.
“Transaction with non-members” refers to cooperative activity providing goods and services to non-members generating net savings/surplus.
“Undivided Net Surplus/Undivided Net Savings” refers to net amount from cooperative operations after deducting operational expenses from revenue generated, not construed as profits, but as excess payments and other inflows of assets resulting from other operating activities, deemed returned to members if distributed as prescribed under Article 86 of Republic Act No. 9520 and the cooperative’s by-laws.
“Unrelated Transactions” refers to cooperative transactions not part of the objectives and purposes enumerated in the Articles of Cooperation.
Types and other terms are further defined in the cooperative-type and classification provisions (e.g., “Cooperatives with accumulated reserves and undivided net savings” categories are used throughout).

Scope, cooperative types, and tax-exemption categories

A cooperative may fall under these types, including credit, consumers, producers, marketing, service, multipurpose, advocacy, agrarian reform, cooperative bank, dairy, education, electric, financial service, fishermen, health services, housing, insurance, transport, water service, workers, and other types as may be determined by the CDA.
Cooperatives are categorized by membership as primary (natural persons), secondary (primaries), and tertiary (secondary cooperatives).
Cooperatives are categorized by territory according to areas of operations which may or may not coincide with political subdivisions.
Tax exemptions are classified by the cooperative’s transactions and financial thresholds:
- Cooperatives transacting with members only; and
- Cooperatives transacting with members and non-members, further sub-classified by:
  - accumulated reserves and undivided net savings of not more than Php10,000,000.00, and
  - accumulated reserves and undivided net savings of more than Php10,000,000.00.

Tax exemptions: members-only and with non-members

A duly registered cooperative transacting business with members only is exempt from paying:
- Income Tax imposed by Title II of the NIRC, as amended;
- VAT imposed under Title IV of the NIRC, as amended;
- Percentage tax imposed under Title V of the NIRC, as amended;
- Donor’s Tax under Title III of the NIRC on donations to duly accredited charitable research and educational institutions and reinvestment to socio-economic projects within the cooperative’s area of operation;
- Excise Tax under Title VI of the NIRC for which it is directly liable;
- Documentary Stamp Tax under Title VII of the NIRC, with the rule that the other party to the taxable document/transaction who is not exempt shall be directly liable;
- Annual Registration Fee of P500.00 under Section 236(B) of the NIRC, as amended;
- Taxes on transactions with insurance companies and banks, including 20% final tax on interest deposits and 7.5% final income tax on interest income derived from a depository bank under the expanded foreign currency deposit system; and
- Electric cooperatives duly registered with the Authority are exempt from VAT on revenues on systems loss and VAT on revenues on distribution, supply, metering and lifeline subsidy of electricity to members.
A duly registered cooperative with accumulated reserves and undivided net savings of not more than Php10,000,000.00 that transacts with both members and non-members is exempt from all national internal revenue taxes for which it is liable as enumerated under the members-only exemption.
A duly registered cooperative with accumulated reserves and undivided net savings of more than Php10,000,000.00 that transacts with both members and non-members is treated as follows:
- Business transactions with members generating revenues are exempt from all national internal revenue taxes enumerated under the members-only exemption.
- Business transactions with non-members require payment of:
  - Income Tax on the amount allocated for interest on capitals:
    - The rule requires that the same tax is not consequently imposed on interest individually received by members.
    - The tax base is the net surplus arising from business transactions with non-members after deducting amounts for statutory reserve funds under the Cooperative Code and other laws.
  - VAT on transactions with non-members, subject to specific VAT exemptions under the NIRC and rules incorporated here:
    - Agricultural cooperatives duly registered and in good standing with the CDA are exempt for specified sales/importations and related transactions to members and non-members under Section 109(L), (M), and (N) of the NIRC as amended by Republic Act No. 9337, including:
      - Sales by agricultural cooperatives to members and non-members (including sale of produce in original or processed form), and importation of direct farm inputs, machineries, and equipment (including spare parts) used directly and exclusively in production/processing of produce.
      - The rule that processed product or its derivative arising from raw materials produced by members, sold in the name and for the account of the cooperative, is deemed the cooperative’s product.
      - A condition for VAT exemption: sale by agricultural cooperatives to non-members is VAT-exempt only if the cooperative itself is the producer; if not the producer (e.g., trader), only sales to members are exempt from VAT.
      - An interpretive rule that products processed by non-members or production not related to the cooperative’s Articles of Cooperation purposes are not considered produced/processed by the cooperative even if sold in the cooperative’s name (e.g., raw materials produced by members and processed by the cooperative are exempt from VAT).
      - A reiteration that sale or importation of agricultural food products in their original state is VAT-exempt irrespective of seller and buyer under Section 4.109-1(B)(a) of Revenue Regulations No. 16-05, as amended.
    - Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the CDA under Section 109(1)(M) of the NIRC, as amended.
    - Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with the CDA, provided each member’s share capital contribution does not exceed P15,000, regardless of aggregate capital and net surplus distributed among members, under Section 109(1)(N) of the NIRC, as amended.
    - Transactions of cooperatives deemed VAT-exempt under the NIRC.
  - Percentage tax at applicable rates on all sales of goods and/or services to non-members, except sales made by producers, marketing, or service cooperatives.
  - All other internal revenue taxes unless otherwise provided by law.
- A cooperative with accumulated reserves and undivided net savings of more than Php10,000,000.00 is entitled to limited or full deductibility of donations to duly accredited charitable, research and educational institutions and reinvestment to socio-economic projects within its area of operation.
- It is entitled to an exemption on taxes on transactions with insurance companies and banks, including 20% final tax on interest deposits and 7.5% final income tax on interest income derived from a depository bank under the expanded foreign currency deposit system, under Article 61(3) of the cooperative code framework referenced in the rules.

Taxation of unrelated income and other liabilities

Income of cooperatives from unrelated transactions is subject to the appropriate taxes under the NIRC, as amended.
All cooperatives, regardless of classification, are subject to:
- Capital Gains Tax from sale/exchange/disposition of real property classified as capital assets and from sale of shares of stock;
- Documentary stamp taxes on transactions dealing with non-members, except transactions with banks and insurance companies, with liability assigned to the non-exempt party when one party enjoys exemption;
- VAT billed on purchases of goods and services, except VAT on importation by agricultural cooperatives of direct farm inputs, machineries and equipment (including spare parts) used directly and exclusively in production/processing of produce under Section 109(L) of the NIRC, as amended;
- A rule on tax-free importations: tax-free importations are not transferred to any person until five (5) years, and if transferred, the cooperative and transferee/assignee are solidarily liable to pay twice the amount of tax and/or duties;
- Withholding tax on compensation/wages, except where an employee is a minimum wage earner, and creditable and final withholding taxes if applicable; all cooperatives are withholding agents for income payments subject to withholding under Revenue Regulations No. 2-98, as amended;
- All other taxes for which cooperatives are directly liable and not expressly exempted by any law.

Members’ tax treatment and patronage refunds

Members of cooperatives pay internal revenue taxes under the NIRC, as amended, except:
- Members are exempt from any tax and fee (including final tax on deposits or fixed deposits, otherwise known as share capital, and documentary tax on transactions of members with the cooperative) on deposits/fixed deposits with cooperatives and transactions with cooperatives.
- Members are exempt from taxes on Patronage Refund, which includes all refunds, returns, or rebates of the net savings generated from cooperative operations.

BIR certificate process, renewal, and validity

Cooperatives issued a new certificate of registration by the CDA in compliance with Article 144(1) of Republic Act No. 9520 and subsequent new cooperatives registered under the same act must secure a Certificate of Tax Exemption/Ruling from the BIR by confirmatory ruling issued by the Regional Director or the Assistant Commissioner of Internal Revenue (ACIR), Legal Service, consistent with their delegated authority.
The application for certificate of tax exemption of cooperatives with accumulated reserves and undivided net savings of not more than Php10,000,000.00 must be acted upon within forty-five (45) days from submission of all required documents.
Such cooperatives must be registered with the BIR but are exempt from the payment of the annual registration fee of P500.00.
Certificate issuance timing and accountability:
- The Certificate of Tax Exemption/Ruling must be signed by the BIR Regional Director/ACIR, Legal Service as the case may be.
- The BIR shall act within forty-five (45) days from submission of complete documentary requirements, otherwise the BIR officer/employee concerned may be held liable under Article 140 of Republic Act No. 9520.
All duly registered cooperatives under Republic Act No. 9520 must apply for the Certificate of Tax Exemption/Ruling within sixty (60) days from the date of issuance of their certificate of registration.
Exemption effectivity:
- Exemption applies to the year the certificate of tax exemption/ruling is issued.
- For initial issuance under Republic Act No. 9520, effectivity starts from the year Republic Act No. 9520 took effect, provided the cooperative has registered with the CDA under Article 144 of Republic Act No. 9520.
- Late applicants are subject to internal revenue taxes prior to issuance; they may apply for tax credit/refund of taxes previously paid from the date of registration with the CDA up to issuance, subject to tax credit/refund rules.
- The BIR must act on requests for tax refund within one hundred twenty (120) days from submission of complete supporting documents.
Certificate validity:
- The Certificate Tax Exemption/Ruling is valid for five (5) years from the date of issue or date of effectivity under the cited exemption-effectivity rule, and remains effective while the cooperative is in good standing as ascertained by the CDA annually.
- The cooperative must submit a copy of the CDA Certificate of Good Standing together with the Income Tax Return and Audited Financial Statements on or before April 15 (the 15th day of the fourth month following close of the calendar year).
Renewal:
- Renewal applications must be filed at least two (2) months prior to the expiration date and shall be acted upon within the period prescribed for issuance.
- Renewal covers five (5) years unless revoked for cause.
- Renewal must be accompanied by specified documents including: CDA certificate of registration (new cooperative code), articles and by-laws, current Certificate of Good Standing (effective on application date, with no processing without it), sworn statement on member/non-member transactions, transaction records distinguishing member and non-member transactions (for cooperatives dealing with both), sworn certifications on accumulated reserves and that at least 25% of net surplus is returned to members as interest on share capital and/or patronage refund, sworn list of members and share capital contribution, and latest audited financial statements.

Documentary requirements and filing workflow

A letter-application signed by the Chairman/General Manager of the cooperative or authorized representative must be submitted to the Revenue District Office with jurisdiction over the cooperative’s principal place of business.
The Revenue District Office must transmit the application within five (5) working days from filing of the letter-application with required documentary requirements to the Legal Division of the Regional Office or to the ACIR, Legal Service as applicable.
The letter-application must state the type of cooperative and the transactions engaged in with members and non-members.
Required attachments to the letter-application include:
- Certified true copy of the CDA Certificate of Registration under the new Cooperative Code;
- Certified true copy of the Articles of Cooperation and By-Laws;
- Current CDA Certificate of Good Standing effective on application date (no processing without it);
- Copy of the BIR Certificate of Registration of the cooperative.
The cooperative’s application for exemption is a prerequisite for availment of tax exemption.
The Certificate of Tax Exemption/Ruling is issued only after BIR determination that the cooperative complied with documentary requirements for entitlement.

Examination controls and settlement rules

The BIR may examine cooperative books of accounts and accounting records for compliance with conditions for tax exemptions and tax liabilities only after previous authorization by the CDA, which must be released within twenty (20) days from receipt of BIR request and copy-furnished to the cooperative.
Formal investigation commences upon issuance of a letter of authority/letter-notice by the Commissioner or authorized representative and the CDA authorization within the prescribed period.
Compromise settlement for unpaid/unsettled assessments:
- Cooperatives previously registered under Republic Act No. 6938 with unpaid/unsettled assessments as of the effectivity of Republic Act No. 9520 may avail of compromise settlement at a compromise rate equal to 20% of the basic tax assessed.
- If the cooperative demonstrates clear inability to pay the assessed tax, Section 204(A)(2) of the NIRC, as amended applies, determined after deducting statutory funds under Republic Act No. 9520, including the Reserve Fund, Educational Fund, Community Development Fund, and Optional Fund.
- The compromised amount may be paid in installments favorable to a duly registered cooperative when there is financial incapacity.

Transitory provisions, repeal, separability

Cooperatives registered under Republic Act No. 6938 are deemed registered under the new framework upon submission to the nearest CDA office of: copy of valid and effective Certificate of Registration, Articles of Cooperation, By-Laws, and Audited Financial Statements within one (1) year from the effectivity of Republic Act No. 9520; failure results in cancellation motu proprio.
After submission and issuance of a new CDA certificate of registration, cooperatives proceed with securing their Certificate of Tax Exemption/Ruling with the jurisdictional Revenue District Office following the established procedure.
Pending applications for tax exemption with the BIR are acted upon by the concerned Regional Director within forty-five (45) days from the effectivity of the Joint Rules and Regulations.
Repeal:
- Revenue Regulations 13-2008, Revenue Regulations 6-2007, and Section 4.114-1(B) and Section 4.109(B)(1)(a) of Revenue Regulations 16-2005 are repealed.
- All other revenue rulings, regulations, and issuances inconsistent with the Joint Rules and Regulations are repealed or modified accordingly.
Separability:
- If any part is held unconstitutional or invalid, the remaining provisions remain effective.