37.3 Cooperatives under the Philippine Cooperative Code (RA 9520)

Cooperatives under the Philippine Cooperative Code (RA 9520)

Cooperatives are autonomous associations of persons united by a common bond to meet their economic, social, and cultural needs. This section covers the Philippine Cooperative Code of 2008 (RA 9520): organization and registration with the Cooperative Development Authority, administration, membership and voting, capital and share limits, audit and members' rights, allocation of net surplus, tax privileges, types and categories of cooperatives, merger, and dissolution.

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1. Philippine Cooperative Code of 2008 (RA 9520)

Statutory Definition and Nature of Cooperatives

Under Article 3 of Republic Act No. 9520, a cooperative is an autonomous and duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve their social, economic, and cultural needs and aspirations. Members make equitable contributions to the required capital, patronize their products and services, and accept a fair share of the risks and benefits in accordance with universally accepted cooperative principles.

The Seven Cooperative Principles

1. Voluntary and Open Membership: Non-discriminatory access for all persons able to use services and willing to accept responsibilities;
2. Democratic Member Control: Governed on a democratic basis: "One Member, One Vote" regardless of the number of shares owned;
3. Member Economic Participation: Capital receives limited interest; surpluses are distributed based on patronage;
4. Autonomy and Independence: Self-help organizations controlled exclusively by members;
5. Education, Training, and Information: Obligation to train members, leaders, and employees;
6. Cooperation among Cooperatives: Working together through local, national, and international structures;
7. Concern for Community: Sustainable community development policies approved by members.

Organization and Registration

• Organizers: Formed by at least fifteen (15) natural persons who are Filipino citizens, of legal age, with a common bond of interest, residing or working in the intended area of operation.
• Registration Authority: Duly registered with the Cooperative Development Authority (CDA). Juridical personality commences upon issuance of the Certificate of Registration under the CDA's official seal.
• Minimum Capitalization Requirements:
  • At least 25% of the authorized share capital must be subscribed;
  • At least 25% of the total subscription must be paid up upon registration; and
  • In no case shall the paid-up share capital be less than PHP 15,000 (the CDA may prescribe higher amounts for specific cooperative categories).

Governance and Capital Structure Rules

• Individual Shareholding Limitation: To prevent capitalist monopolization, no member of a primary cooperative shall own or hold more than 10% of the total share capital of the cooperative.
• Voting Rights: Each member of a primary cooperative has only one (1) vote, irrespective of the size of their share capital contribution. Proxy voting is strictly PROHIBITED in primary cooperatives (permitted only in secondary or tertiary federations).

Allocation and Distribution of Net Surplus (Article 86)

The net surplus of a cooperative is not construed as corporate "profit," but as excess payments made by members returned to them. At the close of each fiscal year, the net surplus is statutorily allocated in the following order:

                         Mandatory Allocation of Net Surplus
                                          │
     ┌─────────────────────┬──────────────┴──────────────┬─────────────────────┐
     ▼                     ▼                             ▼                     ▼
1. Reserve Fund       2. Education & Training       3. Community Dev.      4. Optional Fund
Min 10% of surplus    Max 10% of surplus            Min 3% of surplus      Max 7% of surplus
Buffer for losses;    (50% local co-op,             Community projects     Land, building,
non-distributable     50% apex federation)          and social welfare     special reserves

1. Reserve Fund (Minimum 10%): Set aside as a financial cushion for stability and to absorb operational losses. This fund is non-distributable to members even upon dissolution of the cooperative.
2. Education and Training Fund (Maximum 10%): Half is utilized by the cooperative for member training; the remaining half is remitted to the designated apex federation or union.
3. Community Development Fund (Minimum 3%): Dedicated to financing community projects and social development.
4. Optional Fund (Maximum 7%): Allocated for land, building acquisition, or designated contingencies.
5. Patronage Refunds and Share Capital Interest: The remaining net surplus (at least 70%) is distributed among members in the form of interest on share capital (subject to statutory interest caps) and patronage refunds proportional to each member's individual business patronage with the cooperative.

Tax Exemptions and Privileges

Under Articles 60 and 61 of RA 9520, the tax status of a cooperative depends on whether it transacts exclusively with members or with both members and non-members:

                           Cooperative Tax Exemption Matrix
                                          │
     ┌────────────────────────────────────┴────────────────────────────────────┐
     ▼                                                                         ▼
Transacts EXCLUSIVELY with Members                               Transacts with BOTH Members & Non-Members
100% EXEMPT from ALL national and local taxes                    • Accumulated Reserves <= PHP 10 Million:
(Income tax, VAT, percentage tax, DST, local taxes)                100% Tax Exempt on both member and non-member transactions
                                                                 • Accumulated Reserves > PHP 10 Million:
                                                                   Exempt on member transactions; TAXABLE on non-member business

1. Cooperatives Transacting Exclusively with Members: Enjoy 100% exemption from all national, regional, provincial, city, municipal, and barangay taxes, including Income Tax, Value-Added Tax (VAT), Percentage Taxes, Documentary Stamp Taxes (DST), and local business taxes.
2. Cooperatives Transacting with Both Members and Non-Members:
   • Accumulated Reserves $\le$ PHP 10 Million: Completely exempt from all internal revenue taxes for which they are directly liable on transactions with both members and non-members.
   • Accumulated Reserves $>$ PHP 10 Million: Transactions with members remain 100% tax-exempt. However, transactions with non-members become subject to regular internal revenue taxes (Corporate Income Tax, VAT, and applicable percentage taxes).

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2. Worked Problem: Cooperative Net Surplus Statutory Fund Allocation

Scenario: San Miguel Multipurpose Cooperative reported an audited net surplus of PHP 2,000,000 at the end of its 2026 operating fiscal year. The general assembly adopted the following statutory fund distribution percentages: Reserve Fund at the legal minimum, Education and Training Fund at 8%, Community Development Fund at 5%, and Optional Fund at 5%. Calculate the precise peso distribution for each fund and the remaining amount available for patronage refunds and interest on share capital.

Step-by-Step Allocation Computation:

1. Reserve Fund: Statutory minimum is 10%.

$\text{Reserve Fund} = 10\% \times \text{PHP }2{,}000{,}000 = \mathbf{\text{PHP }200{,}000}$

1. Education and Training Fund: Approved at 8% (within 10% ceiling).

$\text{Education \& Training Fund} = 8\% \times \text{PHP }2{,}000{,}000 = \mathbf{\text{PHP }160{,}000}$

(Allocation: PHP 80,000 retained for internal cooperative training; PHP 80,000 remitted to apex cooperative federation).

1. Community Development Fund: Approved at 5% (exceeds 3% statutory minimum; permissible).

$\text{Community Development Fund} = 5\% \times \text{PHP }2{,}000{,}000 = \mathbf{\text{PHP }100{,}000}$

1. Optional Fund: Approved at 5% (within 7% statutory ceiling).

$\text{Optional Fund} = 5\% \times \text{PHP }2{,}000{,}000 = \mathbf{\text{PHP }100{,}000}$

1. Total Statutory Allocations:

$\text{Total Funds} = \text{PHP }200{,}000 + \text{PHP }160{,}000 + \text{PHP }100{,}000 + \text{PHP }100{,}000 = \mathbf{\text{PHP }560{,}000}$

1. Balance Available for Interest on Share Capital & Patronage Refunds:

$\text{Distributable Balance} = \text{PHP }2{,}000{,}000 - \text{PHP }560{,}000 = \mathbf{\text{PHP }1{,}440{,}000} \quad (72\% \text{ of Net Surplus})$