Co-op members need not be taxed

Cooperatives are not required to withhold taxes on interest from their members’ savings and time deposits, according to the Bureau of Internal Revenue.

According to Revenue Commissioner Kim S. Henares, this ruling still has to be affirmed and publicized following a Supreme Court decision issued in January 2010.

In Revenue Memorandum Circular No. 47-2011, Henares explained that, based on the Supreme Court ruling, the savings and time deposits of members of a cooperative are not subject to the 20-percent withholding tax.

The high court decided in favor of the Dumaguete Cathedral Credit Cooperative, which the BIR in 2002 pursued for failing to withhold taxes of its members.

Based on the BIR’s assessment, the DCCC owes the government P2.95 million—P1.49 million for 1999 and P1.46 million for 2000—in withholding taxes on interest earnings.

Although the DCCC protested the revenue assessment, the BIR failed to act on the matter within the prescribed 180-day period. The cooperative then brought the issue to the Court of Tax Appeals.

In 2007, the CTA ruled in favor of the BIR, ordering DCCC to pay a total of P2.64 million, plus a 20-percent penalty for each year.

According to the Supreme Court, the tax code provides for the imposition of a 20-percent final (withholding) tax on interest from bank deposit as well as earnings from deposit substitutes, trust funds and similar arrangements.

But in its ruling, the high tribunal did not consider savings and time deposits in cooperatives as subject to withholding tax.

In fact, the high court said, this interpretation of the tax code is contained in a BIR ruling issued in 1998 and again in another ruling issued in 2006.

“Petitioner’s invocation [of these two BIR rulings] is proper,” the Supreme Court said.

“The Constitution states that the promotion of social justice shall include the commitment to create economic opportunities based on freedom of initiative and self-reliance. We find that an interpretation exempting members of cooperatives [from the withholding tax] is more in keeping with the letter and spirit of our Constitution.”