The Supreme Court has affirmed that cooperatives are not required to withhold taxes on interest earned from the savings and time deposits of their members. This ruling supports the State’s policy of fostering the growth of cooperatives, recognizing their role in economic development and social justice. It clarifies that the preferential tax treatment afforded to cooperatives extends to their members’ deposits, promoting self-reliance and financial stability within the cooperative sector.

DCCCO vs. CIR: Are Cooperative Member Deposits ‘Similar Arrangements’ Subject to Withholding Tax?

The case of Dumaguete Cathedral Credit Cooperative (DCCCO) vs. Commissioner of Internal Revenue, with G.R. No. 182722 dated January 22, 2010, revolved around whether a credit cooperative was liable to pay deficiency withholding taxes on the interest from savings and time deposits of its members for the taxable years 1999 and 2000. DCCCO, a duly registered cooperative, argued that Section 24(B)(1) of the National Internal Revenue Code (NIRC) applied only to banks and not to cooperatives. The Commissioner of Internal Revenue (CIR) countered that the phrase “similar arrangements” in the NIRC included cooperatives that serve as depositaries for their members. This disagreement brought to the forefront the interpretation of tax laws concerning cooperatives and the extent of their tax exemptions.

The legal framework for this case hinges on the interplay between the NIRC and Republic Act No. 6938, also known as the Cooperative Code of the Philippines, as amended by RA 9520. Section 24(B)(1) of the NIRC imposes a final tax on interest from bank deposits, deposit substitutes, and similar arrangements. RA 6938, on the other hand, declares the State’s policy to foster the creation and growth of cooperatives, providing them with preferential tax treatment. The Supreme Court was tasked with reconciling these provisions to determine whether the interest earned by cooperative members on their deposits should be subject to withholding tax.

The Supreme Court sided with DCCCO, emphasizing that cooperatives and their members deserve preferential tax treatment. It highlighted BIR Ruling No. 551-888, which states that cooperatives are not required to withhold taxes on interest from savings and time deposits of their members. The Court noted that this ruling had been reiterated in subsequent BIR rulings, reinforcing the interpretation that cooperative members’ deposits are not subject to withholding tax under Section 24(B)(1) of the NIRC.

The Court also addressed the argument that the term “similar arrangements” in the NIRC should be interpreted broadly to include cooperatives. It reasoned that RA 6938 and the Constitution mandate the protection and promotion of cooperatives as instruments for social justice and economic development. Allowing the imposition of withholding taxes on members’ deposits would contradict this policy by reducing the financial benefits members receive from their cooperative, the Court stated.

Furthermore, the Supreme Court emphasized the importance of interpreting tax laws liberally in favor of cooperatives and their members, as provided in Article 126 of RA 6938. The court quoted Alonzo v. Intermediate Appellate Court, stating,

“For what is within the spirit is within the statute although it is not within the letter thereof, and that which is within the letter but not within the spirit is not within the statute.”

This underscored the principle that the intent of the law, which is to support cooperatives, should guide its interpretation.

The Court also discussed the legislative history of tax exemptions for cooperatives, pointing out that the tax exemption in RA 6938 was retained in RA 9520, with an amendment explicitly stating that transactions of members with cooperatives are not subject to final taxes on their deposits. The amended Article 61 of RA 9520 reinforces the interpretation that Section 24(B)(1) of the NIRC does not apply to cooperatives. This serves as an example of legislative approval of administrative interpretation by reenactment.

The Supreme Court ultimately ruled that DCCCO was 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. This decision reaffirms the importance of promoting and protecting cooperatives as vital instruments for economic development and social justice, as enshrined in the Constitution and relevant statutes.

FAQs

What was the key issue in this case?	The central issue was whether a credit cooperative is required to withhold taxes on the interest earned from the savings and time deposits of its members.
What did the Court decide?	The Supreme Court ruled that cooperatives are not required to withhold taxes on the interest from the deposits of their members, supporting the preferential tax treatment afforded to cooperatives.
What is Section 24(B)(1) of the NIRC?	Section 24(B)(1) of the National Internal Revenue Code imposes a final tax on interest from bank deposits, deposit substitutes, and similar arrangements.
What is RA 6938?	RA 6938, also known as the Cooperative Code of the Philippines, declares the State’s policy to foster the creation and growth of cooperatives, providing them with preferential tax treatment.
Why do cooperatives receive preferential tax treatment?	Cooperatives receive preferential tax treatment because they are considered instruments for social justice and economic development, as enshrined in the Constitution.
What is the significance of BIR Ruling No. 551-888?	BIR Ruling No. 551-888 states that cooperatives are not required to withhold taxes on interest from savings and time deposits of their members, which was a key basis for the Court’s decision.
How does RA 9520 affect this issue?	RA 9520, which amended RA 6938, expressly states that transactions of members with cooperatives are not subject to final taxes on their deposits, reinforcing the tax exemption.
What is the principle of liberal interpretation in favor of cooperatives?	Article 126 of RA 6938 states that in case of doubt, any provision of the Cooperative Code shall be resolved liberally in favor of the cooperatives and their members.

This case highlights the judiciary’s commitment to supporting the cooperative movement in the Philippines. By exempting members’ deposits from withholding taxes, the Supreme Court has reinforced the financial benefits of cooperative membership and promoted the growth of these organizations as vital contributors to the nation’s economic and social progress.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: DCCCO vs. CIR, G.R. No. 182722, January 22, 2010