Why should cooperatives have a differente tax treatment than other companies

The issue of income tax on cooperatives has been a subject of wide discussion for some time in the media, in congresses and at the level of the Executive Power in several countries in Latin America and the Caribbean. Many arguments presented in these discussions are based on a deep ignorance of what cooperatives really are, their identity, and their principles and values.

"The tax regime has now become a topic of significant importance for cooperatives in the most different parts of the world. The concern is based on the increasing tax burden to which these entities are subjected. There are several reasons that explain this situation: on the one hand, the need to cover increasing fiscal deficits, with the consequent need to increase public revenues, and, on the other, the tendency to consider cooperatives as just another form of business organization without taking into account their specific economic and legal characteristics. The truth is that - especially in recent years - a kind of fiscal persecution against cooperatives, that does not recognize precedents, seems to have been unleashed, taking place even in countries where they traditionally had a favorable tax treatment. This requires an adequate analysis of the problem with a view of seeking a solution that takes into account the specific nature of cooperatives" [1].

THE COOPERATIVE ACT

The Framework Law for Cooperatives in Latin America [2] establishes in its article 6 that cooperatives will be governed by the provisions of the Law, its regulatory norms and, in general, by the principles of Cooperative Law. They will be supplemented by Common Law as far as is compatible with their nature. Likewise, it defines Cooperative Law as the set of special rules, jurisprudence, doctrine and practice based on the principles that determine and regulate the actions of cooperative organizations and the subjects that participate in them.

The same Framework Law, in its article 7, defines it in the following way: "Cooperative acts are those carried out between cooperatives and their members or by cooperatives among themselves in compliance with their social objective and are subject to Cooperative Law", with the following justification:

"A fundamental notion that has been gaining ground in legislation and doctrine in recent years is that of the "cooperative act" - different from the commercial act and other legal acts - that this article incorporates. The concept included is limited to the acts carried out between cooperatives and their members or by cooperatives among themselves, always in compliance with their corporate purpose. However, there are other legal and doctrinal positions that give the notion a broader scope, including, for example, operations with non-members and even all the operations that cooperatives carry out to fulfill their corporate purpose and, especially, the constitutive act, understanding this as the first cooperative act that generates all the others. Hence, it is postulated that the market acts practiced by the cooperative, carried out in compliance with its corporate purpose, linked to the activity of the partners and on their behalf, do not imply income, billing or any property advantage for the cooperative itself.
To clarify, as a fundamental effect, these acts are subject to Cooperative Law, which limits the application of other figures or legal norms strange to the cooperative nature. In all cases, the socio-cooperative relationship is governed by Cooperative Law, which is particularly important in the case of worker cooperatives in order to avoid doubts about the nature of said relationship."

This characterization of the cooperative act recognizes a concept that is already contemplated in several cooperative laws in Latin America and the Caribbean. The cooperative act is the legal notion that defines the activity of cooperatives and, by nature, is essentially different from the act of commerce, typical of the profit-making economy, the administrative act of public law, the civil act, etc. It gives its own distinctive character to cooperatives, which justifies that they should be governed by Cooperative Law, a legal body made up of the cooperative laws, their regulatory provisions and the rules established in the statutes. The distinctive nature of cooperatives as organizations that define their activity with this type of acts justifies that they be regulated with their own and self-sufficient regulatory body and that, only in a supplementary manner, other legal norms that are not conceived in accordance with their nature be applied.

This same chapter includes some rules mainly designed to promote the business strengthening of cooperatives. For example, it is contemplated that cooperatives provide services to non-members, when this is convenient or necessary for their own development and under certain special conditions. One of these conditions is that the result generated by these operations is not distributed among the members (if it were distributed, the cooperative would become a lucrative company) but that it is allocated to a special indivisible reserve or for the purpose of cooperative education, according to the statutes. Consequently, cooperatives can sell their services to other different people as long as the members do not appropriate the product of those activities, which does not affect, then, their character of not-for-profit organizations.
As for the elements that make up the Cooperative Act, as early as 1976 experts in the field established in the so-called Legal Charter of San Juan that: "The cooperative act - analyzed through the abstraction of circumstantial notes - contains certain basic objective elements that characterize their very nature, regardless of the legal definitions that may be formulated in this regard. In principle, the presence of the following elements that make up the notion of the cooperative act is noted:
a. common individual needs;
b. purpose of acting together;
c. solidarity;
d. non-profit service;
e. general well-being." [3]

In this way, the specific characteristics assumed by the cooperative/member relationship make it escape from the scope of commercial law and civil law and assist in the birth of a new figure: "the cooperative act" a different relationship of coexistence, which does not imply a market relationship, but the performance of a social service. The cooperative act is precisely the basic cell that enables the entire legal doctrine of cooperation.

TAX TREATMENT OF COOPERATIVES [4]

From what was said, there are some specific criteria that apply to cooperatives in tax matters depending on the different taxes.

As for the taxes on assets, cooperative legislation generally establishes the indivisibility of the reserves and their disinterested destination in the event of dissolution of the cooperative. Consequently, it is property of a social nature, not belonging to the individual partners. On the other hand, the capital contributed by the members does not have the character of an investment to obtain profit, but it is the condition to be able to use the services of the cooperative; it has a merely instrumental character. Additionally, that capital only gives the right to receive a limited interest and not to appropriate the profits resulting from the management of the cooperative, as it happens in commercial companies.

With respect to income taxes, it should be noted that cooperatives return to their members the annual surplus in proportion to the operations carried out by each one of them. So, in principle, it is up to each of the partners individually to pay taxes on the surplus that they receive. In the event that there is an income tax on companies - and that also applies to cooperatives - it must be borne in mind that if the cooperative is taxed, then its members should not be; otherwise there would be double taxation. On the other hand, it must be borne in mind that in cooperatives the annual surplus is simply an adjustment in the price of the services used by the members during the year, while in a commercial company the profit is the result of a lucrative activity carried out with third parties. Logically, the results derived from the provision of services to non-members must have a different treatment, even when they are not distributable.

Finally, regarding transaction taxes, it should be borne in mind that the operation of cooperatives with their members is of a singular nature since there is no intermediation but rather a common action of cooperatively organized members. For this reason, it is not possible to speak strictly of a transaction between the member and the cooperative, but there is an internal act (which in the legislation of the Mercosur countries is called “cooperative act”). Likewise, when the primary cooperative carries out operations with its second-degree organization, it cannot be said that a transaction exists either, since it is an internal act between them. If this chain of operations is not properly analyzed, duplication of charges may be incurred with the consequent discrimination to the detriment of cooperative members who would end up paying a higher tax than those who are not.

The aforementioned aspects require adequate consideration by the tax legislation, which does not usually take into account those characteristics of cooperatives, especially nowadays when a total uniformity of companies is sought without taking into account their legal form. The argument for this is that consideration of the economic activity carried out should prevail and that no differences should be made that could affect competition. Based on these arguments, cooperatives are often subjected to a tax treatment that may turn out to be more unfavorable than that of other companies.

Finally, the third cooperative principle of economic participation of members is defined by the International Cooperative Alliance in the following terms:

"Members contribute equitably and democratically control the capital of the cooperative. At least part of that capital is the common property of the cooperative. They usually receive limited compensation, if any, on subscribed capital as a condition of membership. Members assign surpluses for any of the following purposes: the development of the cooperative through the possible creation of reserves, of which at least a part must be indivisible; member benefits in proportion to their transactions with the cooperative; and support for other activities as approved by the membership."

What this principle establishes is that, when the cooperative’s activities generate surpluses, its members have the right and the obligation to decide how they should be applied. Firstly, to strengthen institutional development, through the formation of an indivisible reserve, which guarantees the long-term viability of the entity and, in turn, sustainability through the formation of social property. But they can also allocate them to activities of a social nature between themselves or directed towards the community, since the future of the movement and the increase in membership depends on it.