Policy, purpose, and coverage
- The circular implements a tax treatment framework for electric cooperatives registered with either the National Electrification Administration (NEA) or the Cooperative Development Authority (CDA).
- Tax treatment distinguishes ECs based on whether they transact business with members only or with nonmembers/general public, and on their financial thresholds.
- The circular identifies tax items that ECs are exempt from and tax items that ECs remain liable for, including income tax on certain income streams and withholding tax duties.
- The circular ties exemption and liability to the EC’s registration status and to its accumulated reserves and undivided net savings in relation to PHP 10,000,000.00.
NEA-registered electric cooperatives exemptions
- ECs registered with the NEA are exempt from franchise tax under Section 119 of the Tax Code of 1997.
- ECs registered with the NEA are exempt from Value-Added Tax on: (a) sales relative to the generation and distribution of electricity, and (b) importation of machineries and equipment, including spare parts, directly used in the generation and distribution of electricity under Section 109(s) of the Tax Code of 1997.
- ECs registered with the NEA are exempt from income taxes for which they are directly liable under P.D. No. 269, Sec. 39(a)(1).
- ECs registered with the NEA are exempt from all National Government taxes and fees, including franchise, filing, recordation, license, or permit fees or taxes—subject to an end date and a debt-free condition.
- The NEA-registered EC exemption from National Government taxes and fees ends on December 31 of the thirtieth full calendar year after the date of the cooperative’s organization or conversion, or until the cooperative becomes completely free of indebtedness incurred by borrowing—whichever event first occurs.
- For a new cooperative formed by consolidation under Section 29 of P.D. No. 269, the exemption period begins “as of the date” of the beginning of the exemption period for the constituent consolidating cooperative most recently organized or converted under P.D. No. 269 (P.D. No. 269, Sec. 39(a)(2)).
- ECs registered with the NEA are exempt from the Three Percent (3%) Percentage Tax under Section 116 of the Tax Code of 1997.
CDA-registered: no nonmember transactions
- ECs registered with the CDA that do not transact any business with nonmembers or the general public are exempt from franchise taxes under Section 119 of the Tax Code of 1997.
- Such ECs are exempt from income tax on income from operations.
- Such ECs are exempt from Value-Added Tax on: (a) sales relative to the generation and distribution of electricity, and (b) importation of machineries and equipment, including spare parts, directly used in the generation and distribution of electricity under Section 109(s) of the Tax Code of 1997.
- Such ECs are exempt from the Three Percent (3%) Percentage Tax under Section 116 of the Tax Code of 1997.
- Such ECs are exempt from Donor’s Tax on donations to duly accredited charitable, research and educational institutions, and on reinvestment to socio-economic projects within the EC’s area of operation.
- Such ECs are exempt from Excise Tax under Title VI of the Tax Code of 1997 and Documentary Stamp Tax imposed under Title VII of the Tax Code of 1997, with the rule that the other party to the taxable document/transaction who is not exempt is the one directly liable for the tax.
- Such ECs are not required to pay the Annual Registration Fee of PHP 500.00 under Section 236(B) of the Tax Code of 1997.
CDA-registered: transactions with members and nonmembers
- If an EC registered with the CDA transacts business with both members and nonmembers, it is subject to taxes depending on the EC’s business activity and financial thresholds.
- If the EC transacts business with members, it must pay the national internal revenue taxes for which it is directly liable as enumerated under paragraph B(1) of the circular.
- If the EC transacts business with nonmembers and has accumulated reserves and undivided net savings of not more than PHP 10,000,000.00, it must pay the national internal revenue taxes enumerated under paragraph B(1) of the circular.
- ECs that transacts business with nonmembers and have accumulated reserves and undivided net savings of not more than PHP 10,000,000.00 receive an exemption from customs duties, advance sales or compensating taxes on importation of machineries, equipment and spare parts used by them and not available locally as certified by the Department of Trade and Industry.
- For these tax-free imports, the EC must not transfer the imported items to any person until after five (5) years; otherwise, the EC and the transferee/assignee are solidarily liable to pay twice the amount of the tax and/or duties.
- If the EC transacts business with nonmembers and has accumulated reserves and undivided net savings of more than PHP 10,000,000.00, it is exempt from:
- Income tax for ten (10) years from date of registration with the CDA, provided that at least twenty five percent (25%) of net income of the EC is returned to members in the form of interest and/or patronage refund;
- Value-Added Tax on sales relative to generation and distribution of electricity and on importation of machineries, equipment, and spare parts directly used in that activity under Section 109(s) of the Tax Code of 1997;
- Annual Registration Fee of PHP 500.00 under Section 236(B) of the Tax Code of 1997; and
- Donations to charitable, research and educational institutions and investment to socio-economic projects within the area of operation may be tax deductible.
- For ECs exempt under the paragraph for accumulated reserves and undivided net savings of more than PHP 10,000,000.00, the exemption is subject to:
- Income tax after expiration of exemption on the amount allocated for interest on capital, with the condition that the same tax is not consequently imposed on interest individually received by members;
- Sales tax after expiration of the exemption on sales to nonmembers; and
- All other taxes unless otherwise provided in the circular.
Common limitations, bank/insurance, and audits
- All ECs, whether registered with the NEA or CDA, remain subject to the enumerated continuing tax liabilities and rules listed in paragraph (C) of the circular.
- All ECs are considered withholding agents and must file withholding tax returns and remit withholding taxes on all income payments that are subject to withholding.
- All ECs are exempt from payment of taxes on transactions with banks and insurance companies, with the condition that sales or services rendered for nonmembers remain subject to the applicable percentage taxes, except sales made by producers, marketing or service cooperatives.
- Nothing in the circular prevents the examination of the EC’s books of accounts or other accounting records by duly authorized internal revenue officers for internal revenue tax purposes only, after previous authorization by the CDA.
Taxes that all ECs must pay
- ECs must pay a 20% final income tax on interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes, from trust funds and similar arrangements, and on royalties derived from sources within the Philippines.
- ECs must pay a 7.5% final income tax on interest income derived from a depository bank under the expanded foreign currency deposit system.
- ECs must pay Capital Gains Tax on sales or exchanges of real property classified as capital assets or shares of stock.
- ECs must pay Documentary Stamp Taxes on transactions dealing with nonmembers when accumulated reserves and undivided net savings exceed PHP 10,000,000.00.
- ECs must pay VAT billed on purchases of goods and services not exempt.
- ECs must pay all other taxes for which they are not otherwise expressly exempted by any law.
Administrative consequences and penalties
- The circular imposes a compliance obligation on ECs to act as withholding agents by filing withholding tax returns and remitting withholding taxes on income payments subject to withholding.
- The circular imposes a compliance consequence for prohibited transfers of tax-free imports made before five (5) years: the EC and transferee/assignee become solidarily liable to pay twice the tax and/or duties.
Adoption, signatory, and internal implementation
- The circular is adopted on October 20, 2003.
- The circular is signed by GUILLERMO L. PARAYNO, JR., Commissioner.
- The circular is directed to internal revenue officers and others concerned to guide tax enforcement and computation for ECs registered with NEA or CDA, including rules on withholding, audits subject to CDA authorization, and tax-free import transfer restrictions.