Dumaguete Cathedral Credit Cooperative vs. Commissioner of Internal Revenue

Dumaguete Cathedral Credit Cooperative vs. Commissioner of Internal Revenue

[G.R. No. 182722, January 22, 2010]

Doctrines:

         Cooperatives are not required to withhold taxes on interest from savings and time deposits of their members.

    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.

    Although the tax exemption only mentions cooperatives, this should be construed to include the members. It must be emphasized that cooperatives exist for the benefit of their members. In fact, the primary objective of every cooperative is to provide goods and services to its members to enable them to attain increased income, savings, investments, and productivity. Therefore, limiting the application of the tax exemption to cooperatives would go against the very purpose of a credit cooperative. Extending the exemption to members of cooperatives, on the other hand, would be consistent with the intent of the legislature.

Facts:

Petitioner Dumaguete Cathedral Credit Cooperative (DCCCO) is a credit cooperative duly registered with and regulated by the Cooperative Development Authority (CDA). On November 27, 2001, the Bureau of Internal Revenue (BIR) Operations Group Deputy Commissioner, Lilian B. Hefti, issued Letters of Authority Nos. 63222 and 63223, authorizing BIR officers to examine petitioners books of accounts and other accounting records for all internal revenue taxes for the taxable years 1999 and 2000.

On October 16, 2002, petitioner received two other Pre-Assessment Notices for deficiency withholding taxes also for taxable years 1999 and 2000.[10] The deficiency withholding taxes cover the payments of the honorarium of the Board of Directors, security and janitorial services, legal and professional fees, and interest on savings and time deposits of its members.

On October 22, 2002, petitioner informed BIR Regional Director Sonia L. Flores that it would only pay the deficiency withholding taxes corresponding to the honorarium of the Board of Directors, security and janitorial services, legal and professional fees for the year 1999 in the amount of P87,977.86, excluding penalties and interest.

On November 29, 2002, petitioner availed of the VAAP and paid the amounts of P105,574.62 and P143,867.24. corresponding to the withholding taxes on the payments for the compensation, honorarium of the Board of Directors, security and janitorial services, and legal and professional services, for the years 1999 and 2000, respectively.

On April 24, 2003, petitioner received from the BIR Regional Director Flores, Letters of Demand ordering petitioner to pay the deficiency withholding taxes, inclusive of penalties, for the years 1999 and 2000 in the amounts of P1,489,065.30 and P1,462,644.90, respectively.

Issue: Whether or not it is liable to pay the deficiency withholding taxes on interest from savings and time deposits of its members for the taxable years 1999 and 2000, as well as the delinquency interest of 20% per annum.

Held: Petitioners invocation of BIR Ruling No. 551-888, reiterated in BIR Ruling [DA-591-2006], is proper. On November 16, 1988, the BIR declared in BIR Ruling No. 551-888 that cooperatives are not required to withhold taxes on interest from savings and time deposits of their members.

According to the CTA En Banc, the BIR Ruling was based on the premise that the savings and time deposits were placed by the members of the cooperative in the bank. Consequently, it ruled that the BIR Ruling does not apply when the deposits are maintained in the cooperative such as the instant case.

There is nothing in the ruling to suggest that it applies only when deposits are maintained in a bank. Rather, the ruling clearly states, without any qualification, that since interest from any Philippine currency bank deposit and yield or any other monetary benefit from deposit substitutes are paid by banks, cooperatives are not required to withhold the corresponding tax on the interest from savings and time deposits of their members.

In BIR Ruling [DA-591-2006] dated October 5, 2006 the BIR opined that:

x x x x

3. Exemption of interest income on members deposit (over and above the share capital holdings) from the 20% Final Withholding Tax.

The National Internal Revenue Code states that a final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from the deposit substitutes and from trust funds and similar arrangement x x x for individuals under Section 24(B)(1) and for domestic corporations under Section 27(D)(1). Considering the members deposits with the cooperatives are not currency bank deposits nor deposit substitutes, Section 24(B)(1) and Section 27(D)(1), therefore, do not apply to members of cooperatives and to deposits of primaries with federations, respectively.

In this case, BIR Ruling No. 551-888 and BIR Ruling [DA-591-2006] are in perfect harmony with the Constitution and the laws they seek to implement. Accordingly, the interpretation in BIR Ruling No. 551-888 that cooperatives are not required to withhold the corresponding tax on the interest from savings and time deposits of their members, which was reiterated in BIR Ruling [DA-591-2006], applies to the instant case.

Members of cooperatives deserve a preferential tax treatment pursuant to RA 6938, as amended by RA 9520.

Given that petitioner is a credit cooperative duly registered with the Cooperative Development Authority (CDA), Section 24(B)(1) of the NIRC must be read together with RA 6938, as amended by RA 9520. Under Article 2 of RA 6938, as amended by RA 9520, 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 legislative intent to give cooperatives a preferential tax treatment is apparent in Articles 61 and 62 of RA 6938, which 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 government 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 nonmembers shall not be subject to tax on their transactions to members. Notwithstanding the provision of any law or regulation to the contrary, such cooperatives dealing with nonmembers shall enjoy the following tax exemptions; x x x.

This exemption extends to members of cooperatives. It must be emphasized that cooperatives exist for the benefit of their members. In fact, the primary objective of every cooperative is to provide goods and services to its members to enable them to attain increased income, savings, investments and productivity. Therefore, limiting the application of the tax exemption to cooperatives would go against the very purpose of a credit cooperative. Extending the exemption to members of cooperatives, on the other hand, would be consistent with the intent of the legislature. Thus, although the tax exemption only mentions cooperatives, this should be construed to include the members, pursuant to Article 126 of RA 6938, which provides:

ART. 126. Interpretation and Construction. In case of doubt as to the meaning of any provision of this Code or the regulations issued in pursuance thereof, the same shall be resolved liberally in favor of the cooperatives and their members.

All told, we hold that petitioner is not liable to pay the assessed deficiency withholding taxes on interest from the savings and time deposits of its members, as well as the delinquency interest of 20% per annum.

In closing, 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 States 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.