G.R. No. 182722 April 7, 2009
DUMAGUETE CATHEDRAL CREDIT COOPERATIVE [DCCCO], Represented by Felicidad L. Ruiz, its General Manager, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.

FACTS

Petitioner Dumaguete Cathedral Credit Cooperative (DCCCO) is a credit cooperative registered with the Cooperative Development Authority. The Bureau of Internal Revenue (BIR) issued Letters of Authority to examine DCCCO’s books for taxable years 1999 and 2000. Subsequently, the BIR issued Pre-Assessment Notices and, later, Letters of Demand for deficiency withholding taxes, including those on interest from savings and time deposits of its members. DCCCO paid the deficiency taxes for honoraria, security services, and professional fees but protested the assessment on interest from members’ deposits. After the Commissioner of Internal Revenue failed to act on its protest within 180 days, DCCCO filed a Petition for Review with the Court of Tax Appeals (CTA). The CTA First Division partially granted the petition, canceling assessments on certain items but affirming the deficiency withholding taxes on interest from members’ savings and time deposits. The CTA En Banc denied DCCCO’s petition, holding that DCCCO’s business falls under “similar arrangements” in Section 24(B)(1) of the National Internal Revenue Code (NIRC) and thus it should have withheld the 20% final tax on such interest.

ISSUE

Whether or not petitioner DCCCO is liable to pay deficiency withholding taxes on interest from savings and time deposits of its members for taxable years 1999 and 2000, as well as the delinquency interest of 20% per annum.

RULING

No. The Supreme Court ruled that DCCCO is not liable for the deficiency withholding taxes on interest from its members’ savings and time deposits. The Court held that Section 24(B)(1) of the NIRC, which imposes a 20% final tax on interest from bank deposits and yield from “trust funds and similar arrangements,” does not apply to cooperatives. The phrase “similar arrangements” refers to arrangements akin to trust funds, not to cooperatives’ deposit transactions. The Court cited BIR Ruling No. 551-888, which explicitly states that cooperatives are not required to withhold taxes on interest from savings and time deposits of their members. This ruling, reiterated in BIR Ruling [DA-591-2006], reflects the administrative construction of the tax law, which is accorded great respect and weight. Furthermore, the constitutional and statutory policy of fostering the growth of cooperatives supports a interpretation that does not impose withholding tax obligations on cooperatives for their members’ deposit interest, absent a clear and categorical provision in the tax code. The assessments for deficiency withholding taxes on interest were therefore canceled.