VAT Exemptions for Cooperatives in the Philippines: A Comprehensive Legal Guide (Updated 15 July 2025 – Philippine jurisdiction)
Executive Snapshot
Under Philippine law, properly registered cooperatives enjoy a suite of value-added tax (VAT) privileges—principally exemption, but occasionally zero-rating—designed to promote inclusive, member-owned enterprise. These incentives rest on Section 109(1)(L) of the National Internal Revenue Code (NIRC), as repeatedly amended, and are fleshed out by the Philippine Cooperative Code of 2008 (Republic Act 9520), later harmonised with the Tax Reform for Acceleration and Inclusion (TRAIN) Act (RA 10963) and numerous Bureau of Internal Revenue (BIR) issuances. The benefit is neither automatic nor perpetual: it hinges on cooperative registration with the Cooperative Development Authority (CDA), BIR certification, and continued compliance with capital and operational caps (notably the ₱10 million threshold on accumulated reserves and undivided net savings).
1. Policy & Constitutional Foundation
- 1987 Constitution, Art. XII §15 declares the State shall "promote, encourage, and foster the creation of cooperatives as instruments for social justice and economic development."
- Section 109(1)(L) NIRC translates this policy into a tax incentive, exempting specified cooperative transactions from VAT to enhance competitiveness versus traditional for-profit firms.
2. Overview of the Philippine VAT Regime
| Feature | Regular VAT | Cooperative VAT Privilege |
|---|---|---|
| Rate | 12 % (Sec. 106–108, NIRC) | 0 % or exempt depending on transaction |
| Registration threshold (general) | Aggregate annual sales/receipts > ₱3 million | Not determinative if Sec. 109(1)(L) conditions met |
| Input VAT creditable? | Yes | No (exempt). Inputs form part of cost; credit/producer co-ops may enjoy zero-rating on certain imports. |
3. Statutory Basis of the Exemption
| Law / Provision | Core Rule |
|---|---|
| NIRC §109(1)(L) | VAT-exempts the sale by agricultural cooperatives of their members’ produce, the sale by CDA-registered cooperatives to members, and the importation of direct farm inputs, machineries and equipment, provided the co-op’s accumulated reserves and undivided net savings do not exceed ₱10 M. |
| RA 9520 (Cooperative Code), Arts. 61–62 | Reconfirms tax privileges and details CDA oversight; requires BIR certification for any exemption. |
| RA 10963 (TRAIN) | Kept Sec. 109(1)(L) intact but lowered the general VAT threshold to ₱3 M; clarified that the co-op exemption is separate and superior to the threshold regime. |
| Special Laws | e.g., RA 9136 (EPIRA) & RA 11364 (NEA law) affect electric cooperatives; Republic Act 9997 governs credit co-ops with deposit-taking functions. |
4. BIR Implementing Rules & Key Issuances
| Issuance | Substance |
|---|---|
| Revenue Regulations (RR) 10-2010 | Consolidated guidelines: documentary proof, CDA certification validation, mechanics for zero-rating on imports. |
| RR 8-2021 | Updated formats for Certificates of VAT Exemption (CVE) and cancellation procedures once a co-op breaches caps. |
| Revenue Memorandum Circulars (RMC) 4-2010, 64-2012, 47-2020 | FAQs and sample invoicing language; reiterates requirement to segregate member vs. non-member sales. |
| BIR Ruling (BIR-LTAD II-010-19) | Clarified that franchise fees received by transport cooperatives from LTFRB remain VAT-exempt. |
Always check the latest RRs/RMCs—BIR revises formats frequently.
5. Eligible Cooperatives & Scope of Exempt Transactions
Producer/Agricultural Co-ops
- Sale to members & non-members of unprocessed or primary-processed produce (e.g., drying, threshing, shelling still exempt).
- Importation of fertilisers, feeds, seeds, breeding stock, and farm machinery zero-rated.
Consumer & Marketing Co-ops
- Sale of goods and services to own members exempt.
- Sales to the public are VAT-able once total public sales exceed ₱3 M in any 12-month period or co-op breaches the ₱10 M capital cap.
Credit & Financial Service Co-ops
- Member-based lending, deposit, and payment services are VAT-exempt; documentary-stamp-tax-exempt as well.
- Income from non-member financing is VAT-able.
Electric Cooperatives
- Only those that have converted and registered with the CDA (per DOE Dept. Circular 2019-07-0011) may claim VAT exemption under Sec. 109(1)(L).
- NEA-registered entities are treated as non-profit utilities—their sales of electricity remain VAT-liable at 12 %.
Transport, Water Service, Housing & Other Co-ops
- Core service rendered to members is exempt.
- Fare, tariff, or rental charged to the public may be exempt if the co-op demonstrates member patronage basis; otherwise VAT applies.
6. Capital Cap & Transition Rules
| Threshold | Consequence |
|---|---|
| Accumulated reserves + undivided net savings ≤ ₱10 M | Stays VAT-exempt. Must annually submit audited FS to CDA & BIR to prove eligibility. |
| Exceeds ₱10 M | Automatic VAT registration on the first day of the quarter following the breach (Sec. 109 last paragraph). Co-op must: (a) file BIR Form 1905 to update status, (b) issue VAT invoices/ORs, (c) begin monthly & quarterly VAT returns (2550M/2550Q). |
No “grandfather” clause: once capital grows beyond the cap, exemption is lost prospectively.
7. Registration & Documentary Requirements
Primary Registration – Secure Certificate of Registration from CDA.
BIR Certification – File:
- BIR Form 1901 or 1920 (co-op with head office & branches),
- Original CDA certificate & by-laws,
- Board resolution designating tax liaison,
- Latest audited FS showing capital below ₱10 M,
- Pay ₱100 application fee (BIR), plus Documentary Stamp Tax (DST) on articles/by-laws (although RA 9520 exempts co-ops, BIR still requires stamping then claims exemption).
Issuance of CVE – Valid for three (3) years unless earlier revoked.
Annual Requirements – Submit CPA-audited FS to both CDA and BIR; failure triggers revocation.
8. Tax Treatment Mechanics
| Aspect | Exempt Co-op | Once VAT-registered |
|---|---|---|
| Input VAT | Not creditable; becomes part of cost. | Creditable; carry-over rules apply. |
| Invoicing | Must state “VAT-Exempt Sale under Sec. 109(1)(L), NIRC (as amended)” | Full VAT invoice/OR with 12 % VAT |
| Apportionment | If operating both exempt and VAT-able activities, maintain separate books or allocate common expenses per RR 16-2005. | N/A |
| Refunds | Generally none (no VAT paid). | Standard input VAT refund regime under Sec. 112. |
| Penalties | Issuing VAT-exempt invoices without entitlement → ₱1,000 per invoice + administrative offense under Sec. 264. | Usual VAT penalties for late filing/non-payment. |
9. Jurisprudence Highlights
| Case | G.R. No. / Date | Take-away |
|---|---|---|
| Commissioner of Internal Revenue v. Philippine Rural Electric Co-op Association (PHILRECA) | G.R. 167146, July 8 2010 | NEA-registered electric co-ops are NOT VAT-exempt; CDA registration indispensable. |
| Phil. Coconut Producers Federation (COCOFED) v. Republic | G.R. 147062–64, Dec 14 2001 | Reiterated that tax exemptions are strictly construed against claimants; conditions set by statute must be met in toto. |
| CIR v. Cooperative Rural Bank of Davao City | G.R. 161293, Nov 23 2016 | Confirmed that co-op’s banking income from members is exempt; non-member operations taxable. |
| CIR v. First Community Cooperative (FICCO) | CTA EB 1367, Apr 17 2017 | Failure to present CDA certificate for the relevant period fatally undermines VAT-exemption claim in audit. |
10. Common Pitfalls & BIR Audit Focus
- Member vs. Non-Member Sales Not Segregated – Co-ops must maintain patronage ledgers; BIR disallows blanket exemption.
- Capital Cap Monitoring – Some co-ops exceed ₱10 M but continue issuing VAT-exempt receipts. BIR back-assesses VAT plus 50 % surcharge and interest.
- Branch Operations – Each branch needs a BIR Certificate of Exemption or else branch sales are default VAT-able.
- Unregistered Subsidiaries – A subsidiary corporation cannot piggy-back on the parent co-op’s exemption.
- Inconsistent CDA & BIR Data – Failure to file annual COOP-PESOS and CAPR with CDA results in revocation of CDA certificate, which automatically voids BIR VAT exemption.
11. Zero-Rating vs. Exemption: When Does 0 % VAT Apply?
- Importation of capital equipment, farm implements, breeding stock and genetic materials by agricultural producer co-ops is zero-rated (Sec. 109(1)(L)(ii)).
- The co-op must secure a VAT Zero-Rate Certificate from BIR’s VAT Credit Audit Division (VCAD) prior to importation.
- Zero-rating allows input VAT claim or refund by the foreign exporter, whereas exemption does not generate any input tax credit.
12. Interplay with Other Taxes
| Tax | Default Treatment for Eligible Co-ops | Key Authority |
|---|---|---|
| Income Tax | Exempt on transactions with members; taxable on non-member income (Sec. 27 & 28, NIRC; Art. 61, RA 9520). | BIR RMC 35-2012 |
| Documentary Stamp Tax | Exempt on instruments of loan or transfer between members & co-op. | Sec. 199, NIRC |
| Local Business Tax/Fees | LGUs generally honour co-op exemption (Sec. 133(n), Local Government Code) but may impose fees for services. | DILG Opinion 2018-03 |
| Real Property Tax | No automatic exemption; co-op may claim under Local Government Code Art. VII if property is actually, directly and exclusively used for the co-op’s purposes. |
13. Current Reform Proposals (19th Congress)
- House Bill 4337 seeks to replace sector-specific VAT exemptions with a broad-based 12 % VAT plus targeted subsidies.
- Senate Bill 1906 proposes raising the ₱10 M capital cap to ₱30 M indexed to inflation.
- As at July 2025 neither bill has reached bicameral conference; co-ops should monitor DOF pronouncements.
14. Comparative Snapshot: ASEAN Peers
| Country | Co-op VAT Treatment |
|---|---|
| Philippines | Statutory exemption tied to capital cap & member patronage. |
| Indonesia | No special VAT break; co-ops subject to general VAT but many fall below the IDR 500 M threshold. |
| Malaysia | Consumer co-ops generally exempt if annual turnover < MYR 500 K; producer co-ops taxable. |
| Thailand | Agricultural co-ops enjoy 0 % VAT on farm-gate sales; VAT on processed goods. |
15. Practical Compliance Checklist
- Validate CDA Registration – Ensure up-to-date certificate.
- Secure BIR CVE – Renew every 3 years or upon change in circumstances.
- Segregate Books – Member vs. non-member, exempt vs. VAT-able.
- Monitor Capital Cap Monthly – Board resolution once ≥ ₱9 M to pre-empt VAT registration.
- Review Contracts – Insert VAT-exemption clause referencing Sec. 109(1)(L).
- Train Staff – Proper invoice language and awareness of threshold effects.
16. Conclusion
The Philippine VAT regime grants cooperatives a powerful—but conditional—competitive edge. Boards and managers must treat the exemption as a privilege, not a right, earned through meticulous CDA/BIR compliance and transparent member-oriented operations. With heightened BIR audit intensity and pending tax reform, cooperatives that institutionalise robust monitoring systems today will safeguard both their exemption and their social-development mission tomorrow.
Disclaimer: This article is for general information only and does not constitute legal advice. Professional counsel should be sought for specific fact situations.