Tax Exemption for Cooperatives

1. Cooperatives That Do Not Transact with Non-Members

  • Fully exempt from all taxes and fees under internal revenue laws and other tax laws.

2. Cooperatives That Transact with Both Members and Non-Members

A. Transactions with Members

  • Exempt from all taxes and fees, including:
    • Final taxes on members' deposits
    • Documentary stamp tax

B. Transactions with Non-Members

  1. If Accumulated Reserves & Undivided Net Savings Are ≤ ₱10 Million
    • Exempt from all national, city, provincial, municipal, or barangay taxes.
    • Exempt from customs duties, advance sales, or compensating taxes on imported machinery, equipment, and spare parts (if certified unavailable locally by DTI).
    • Restriction: Imported tax-free items cannot be sold or transferred within 5 years; otherwise, double the tax amount applies.
  2. If Accumulated Reserves & Undivided Net Savings Are > ₱10 Million
    • Subject to the following taxes:
      • Income Tax: On amounts allocated as interest on capital (but not on members’ received interest).
      • Value-Added Tax (VAT): On transactions with non-members, except for specific exemptions under Section 109 of the National Internal Revenue Code.
      • Other Taxes: Unless otherwise specified.
    • Tax Deductible Items:
      • Donations to charitable, research, and educational institutions
      • Reinvestment in socioeconomic projects within the cooperative’s area
  3. For All Cooperatives (Regardless of Size of Reserves & Savings)
    • Exempt from local taxes.
    • Exempt from taxes on transactions with banks and insurance companies.
    • Sales/services for non-members are subject to applicable percentage taxes.
    • Books and records can be examined by internal revenue officers for tax purposes (with prior authorization from the Cooperative Development Authority).

The tax exemption of cooperatives is based on the principle of mutuality and their social function. Cooperatives are formed primarily to serve their members rather than to generate profit for private interests. Since cooperatives operate on a not-for-profit basis—redistributing earnings among members or reinvesting them for collective benefit—the government grants tax exemptions to promote their growth and contribution to economic and social development. This principle recognizes that cooperative earnings come from transactions among members, which do not generate taxable income in the same way as corporations engaged in profit-making activities.

Definition of Terms

Profit

  • Profit refers to the financial gain realized when revenue from business activities exceeds expenses, costs, and taxes.
  • In a corporate setting, profit is typically distributed to shareholders as dividends.
  • In a cooperative, earnings are not considered profit in the traditional sense but rather surplus that belongs collectively to the members.

Surplus

  • Surplus is the excess revenue of a cooperative after covering operational expenses, costs, and other obligations.
  • Unlike profit in corporations, surplus in cooperatives is distributed to members as patronage refunds or interest on capital or retained for reinvestment in the cooperative.

Accumulated Reserves

  • Accumulated reserves are the portion of a cooperative’s surplus that is retained instead of being distributed to members.
  • These reserves strengthen the cooperative’s financial stability and can be used for expansion, loan funds, education, and other cooperative development activities.
  • In some cases, the law mandates that a portion of surplus be set aside as