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Upholding the tax privileges of cooperatives

Upholding the tax privileges of cooperatives by: Oliver Gil M. Beltran

“The power to tax is the power to destroy.” Those were the strong words of Chief Justice Marshall in McCulloch vs. The State of Maryland, 4 Law Ed. 579.

However, as elucidated in J.B.L. Reyes vs. Almanzor, et al., G.R. Nos. L-49839-46, April 26, 1991, the web or unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmes' pen, thus: "The power to tax is not the power to destroy while this Court sits…So it is in the Philippines." 

Considered as the last bastion of justice, the Supreme Court (SC) is often tasked to rule on conflicting claims and rights of party litigants. A case in point is the recent landmark decision promulgated by the Court on January 22, 2010 (G.R. No. 182722) involving a credit cooperative from the south, in which two noble, albeit incompatible, policies of the State were in issue.

In the abovementioned case, the long standing principle that tax exemptions are highly disfavored and construed strictissimi juris against the taxpayer and liberally in favor of the taxing power is set in opposition against the similarly avowed policy of the State of fostering the creation and growth of cooperatives as instruments of the social justice provision enshrined in the Constitution.

Previously, the First Division of the Court of Tax Appeals (CTA) held that the subject credit cooperative is liable for deficiency withholding taxes on interest from savings and time deposits of its members for taxable years 1999 and 2000, including delinquency annual interest of 20 percent. 

The CTA En Banc went on to subsequently affirm the credit cooperative’s supposed deficiency withholding tax liability.

The CTA En Banc held that the cooperative’s conduct of business constitutes activities under the phrase 'similar arrangements' contained in Section 2.57.1 of Revenue Regulations No. 02-98 which expressly requires the withholding of 20 percent final tax therefrom. 

The CTA En Banc further said that being a withholding agent, the cooperative is therefore obliged to file withholding tax returns on all income payments subject to withholding.

On appeal, the SC reversed the aforementioned ruling and declared that the spirit of the law mandates that cooperatives and all their members are entitled to a preferential tax treatment.

According to the SC, Bureau of Internal Revenue (BIR) Ruling Nos. 551-88 dated November 16, 1988, and DA-591-2006 dated October 5, 2006, being in perfect harmony with the Constitution and the laws that they seek to implement, apply in the instant case.

The SC upheld the two BIR rulings which confirm that interest from any Philippine currency bank deposit and yield or any monetary benefit from deposit substitutes subject to the 20 percent final tax pertain to those paid by banks. Hence, cooperatives are not required to withhold said 20 percent final tax on the savings account and time deposits of their members.

These pronouncements by the Court underscore the importance for taxpayers to secure BIR rulings concerning the taxability of transactions affecting their daily operations for the reason that BIR rulings serve as an assurance of the correctness and accuracy of the interpretation of gray areas in taxation. It is noteworthy that the SC has time and again accorded great weight to the interpretations of administrative agencies in charge of enforcing a law, so long as these are not in sharp conflict with the Constitution and the law.

The respect given to such interpretations is further manifested through the principle of legislative approval of administrative interpretation by reenactment, which provides that the reenactment of a statute substantially unchanged is persuasive indication of the adoption by Congress of a prior executive construction.

In other words, “(w)hen a statute is susceptible of the meaning placed upon it by a ruling of the government agency charged w ith its enforcement and the Legislature thereafter re-enacts the provisions with substantial charge, such action is to some extent confirmatory that the ruling carries out the legislative purpose.” (Laxamana vs. Baltazar, 92 Phil. 32; Mead Corporation vs. Commissioner of Internal Revenue, 116 F (2d) 187). 

The aforesaid principle was applied in the instant case since the subject section of the old Cooperative Code was re-enacted under Section 61 of Republic Act (RA) No. 9520 (also known as Philippine Cooperative Code of 2008), with an additional sentence that effectively affirmed the previous interpretation of the BIR that Section 24(B)(1) of the Tax Code does not apply to cooperatives.  

Hence, Section 61 of RA 9520 specifically provided that, “…the transactions of members with cooperatives shall not be subject to any taxes and fees, including but not limited to final taxes on members’ deposits and documentary tax.”

The Court stressed that Section 24(B)(1) of the Tax Code must be read in relation to RA 6938, as amended by RA 9520. 

Section 61 of RA 6938 provides that cooperatives that do not transact any business with nonmembers or the general public shall not be subject to any government taxes or fees imposed under the internal revenue laws and other tax laws.   

Section 126, on the other hand, requires that in case of doubt as to the meaning of any provision of the Cooperative Code or the implementing regulations, the same shall be resolved liberally in favor of the cooperatives and their members. 

Clearly, the legislative intent is for cooperatives to be given preferential tax treatment, which extends to all the members of such cooperatives, in accordance with Section 126 of RA 6938. The SC held that “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.”

Truly, in a democracy like ours, the exercise of a great power is neither absolute nor unyielding. It bows down to the calls of justice, equality, and to the primacy of the common good.

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.

This article is not intended to be a substitute for professional advice.  For comments and inquiries, you may e-mail the author at  For other tax concerns, please check out our other tax services.