The Supreme Court, in a precedent-setting decision, has ruled that savings and time deposits of credit cooperative members are not subject to 20 percent withholding tax.

The ruling arose from the case of Dumaguete Cathedral Credit Cooperative (DCCCO), which has been ordered by the Court of Tax Appeals (CTA) and the regional office of the Bureau of Internal Revenue (BIR) in Bacolod City to pay for the deficiency 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.

In a decision penned by Associate Justice Mariano del Castillo, the High Court reversed the Dec. 18, 2007 decision of the CTA that upheld the two Pre-Assessment Notices for deficiency withholding taxes issued against DCCCO by the BIR Region 12 office.

The SC assailed the CTA for disregarding BIR Ruling No. 551-888 promulgated on Nov. 16, 1988 in which the country’s major tax collecting agency declared that cooperatives are not required to withhold taxes on interest from savings and time deposits of their members.

It also disagreed with the CTA’s contention that the BIR ruling was based on the premise that the deposits were placed by cooperative members in the bank and that such ruling does not apply when the deposits are maintained in the cooperative.

“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,” the High Court said.

This interpretation, the SC added, was reiterated in BIR Ruling DA-591-2006 dated Oct. 5, 2006, which was issued upon the request of the cooperatives for a “confirmatory” ruling on several issues, among which is the alleged exemption of interest income on members’ deposits from the 20 percent final withholding tax.

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 Republic Act (RA) 6938 or the Cooperative Code of the Philippines, as amended by RA 9520.

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 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 court said.

According to the SC, the tax exemption provided under Article 126 of RA 6938 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,” the court said.

“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,” it added.