House Bill 4774 or the proposed Tax Reform for Acceleration and Inclusion Bill (or TRAIN Bill) threatens to repeal the tax exemptions of cooperatives. As a result, Philippine cooperatives are enraged with this proposed bill in Congress which aims to abolish their privilege of tax exemption.
We at DCCCO and the other cooperatives are not opposed to the entire TRAIN Bill. However, we are particularly wary on the provisions of the proposed law which seeks to repeal section 60 and 61 of the Cooperative Code of the Philippines (RA 9520). These provisions give cooperatives tax exemption privileges, of which among the non-taxable income of cooperatives are those derived from transactions with its members.
Articles 61 and 62 of RA 6938, as amended by RA 9520, read:
ART. 61. Tax Treatment of Cooperatives. Duly registered cooperatives under this Code which do not transact any business with non-members or the general public shall not be subject to any taxes and fees imposed under the Internal Revenue Laws and other tax laws. Cooperatives not falling under this article shall be governed by the succeeding section.
ART. 62. Tax and Other Exemptions. Cooperatives transacting business with both members and non-members shall not be subjected to tax on their transactions to members. In relation to this, the transactions of members with the cooperative shall not be subject to any taxes and fees, including but not limites to final taxes on members’ deposits and documentary tax. Notwithstanding the provision of any law or regulation to the contrary, such cooperatives dealing with non-members shall enjoy the following tax exemptions: x x x.
The repeal of the provisions is inappropriate and misdirected and defeats the very essence of why cooperatives exist.
One reason why the repeal is unsuitable is grounded on the creation of the Cooperative Development Authority. The CDA is mandated in Section 15, Article XII of the Constitution which says that it is the policy of the state “to promote the viability and growth of cooperatives as instruments of equity, social justice, and economic development.” Hence, repealing tax exemption of cooperatives will defeat the very intent of the 1987 Constitution.
It must be remembered always that cooperatives are voluntary organizations of people who want to improve their economic lives using their own initiatives and employing their own resources.
As we all know, cooperatives are created mostly by poor Filipino individuals who contributed small amounts to the organization on one collective purpose — to alleviate them from poverty. In short, cooperatives are government allies to alleviate scarcity and financial insufficiency of people residing in this country.
Our legislators in Congress and Senate should learn from the landmark case of the Dumaguete Cathedral Credit Cooperative (DCCCO) vs. Commissioner of Internal Revenue (CIR), G.R. No. 182722, January 22, 2010 since the arguments and ultimate decision of the Supreme Court was based on social justice in the Constitution.
The issue in this case was — is DCCCO liable to pay the deficiency withholding taxes on interest from savings and time deposits of its members, as well as the delinquency interest of 20% per annum?
The Supreme Court held that the Cooperative is not liable.
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 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 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.
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.
In a nutshell, cooperatives, including their members, 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. To borrow the words of Justice Isagani A. Cruz, “The power of taxation, while indispensable, is not absolute and may be subordinated to the demands of social justice.”
The reason for the drafting of HB 4774 was for the government to have access to additional funds to finance the 10-Point Socio-Economic Agenda of the Duterte administration. OK, I am not opposed to the idea that government should source out money to fund whatever needs to be funded, however, they have to be completely circumspect on where they source out their funds. Government should not “kill the hen that lays the golden eggs,” so to speak and that is because cooperatives are allies of the government.
Everyone has witnessed how cooperatives have become a partner of the government in combating insufficiency and economic imbalance. For over 100 years now since the first cooperative decree was ratified, cooperatives have been operating in every curve and bend of the archipelago. Therefore, policies conducive to cooperative growth and development must be created or sustained.
As demarcated within the Philippine Cooperative Code, a cooperative “is an autonomous and duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve their social, economic, and cultural needs and aspirations by making equitable contributions to the capital required, patronizing their products and services and accepting a fair share of the risks and benefits of the undertaking in accordance with universally accepted cooperative principles.” In other words, cooperatives are member-owned ventures whose objectives are not to maximize profits but to operate in order to address the social, economic and cultural needs of the members. The success and sustainability of a cooperative then relies strongly on relationships with its member-owners.
In the country today, there are 26,243 cooperatives registered with the Cooperative Development Authority, with combined membership of 13.7 million.
Cooperatives prop up food security. Producers’ coops, dairy coops, agrarian coops, farmers’ coops, fishermen coops. On the other hand, marketing cooperatives help individual farmers, fisher folk and small entrepreneurs achieve economies of scale in trimming down production costs and enhance value chain participation.
The 7,421 agricultural coops in the country have members who are farmers and fisher folks and who are usually the ones deprived of livelihood and economic opportunities. These are the sectors who belong to the poorest of the poor.
In the service and utility sectors, we have housing coops, water service coops, labor service coops, transport service coops, electric coops and health service coops providing cheaper alternative but quality services.
The 6,770 multi-purpose cooperatives offer a wide range of products and services. And as most people would say, co-ops services range from womb to tomb. Co-ops run hospitals, schools, cooperative banks, pharmacies and even funeral care services. In 2015, cooperatives directly employed 520,758 Filipinos and generated indirect employment of 1,923,047.
Cooperatives support and empower the most helpless segments of our society such as women, youth and persons-with-disabilities so that they can participate in economic activities and partake in nation building.
To sum the significance of cooperative enterprises, it can be safely said then that our cooperatives serve as catalysts for local and national development and as instruments for people empowerment.
While the proposed bill has good intentions, repealing Articles 60 and 61 of the Philippine Cooperative Code (RA 9520) will threaten co-ops’ sustainability.
Tax treatment on cooperatives should not be the same with the usual businesses. Whatever earnings obtained by the cooperative are given back to the member owners in the form of dividends.
And let’s face it, CDA budget remains dismal. In 2010, the agency was appropriated P267.5-M. It was decreased to P257-M in the following year. CDA budget from 2012-2016 increased a bit; 321-M in 2012, 332-M in 2013, 320-M in 2014, 320-M in 2015 and 329-M in 2016. This amount is so meager given the volume of functions it has to perform. For 2017, the CDA originally proposed P838-M budget but the DBCC only approved P429-M. This is definitely not enough to meet the targets of the agency.
If this administration is serious in taking the more than nine million Filipinos out of poverty, the repeal of the coop tax exemption and other privileges stipulated in Articles 60 and 61 of the Cooperative Code must not be pushed through and such provision should be scrapped from the proposed Fiscal Incentives Bill.
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Author’s email: wea_129@yahoo.com
