Problems of "profit" taxation of cooperatives: theoretical and practical aspects

Abstract

The issue of taxation is very important for cooperatives in many countries. They often payprofit taxes on a general basis, like any other commercial company. At first glance, this seems tobe correct, since all forms of business should work under equal terms. However, such an approachis fair only for the entities which have similar economic nature and the goal of maximizingreturns on invested capital. But cooperatives significantly differ from businesses by nature andpurpose of their activity. This purpose is not to maximize return on invested capital, but toprovide services to the members of coop. Therefore, the difference between the received incomeand the expenses incurred by cooperatives cannot be interpreted as profit in the traditional senseof this word. These earnings are not the purpose of cooperative’s activity. They havefundamentally different economic nature. This is confirmed by the fact that existence of acooperative does not lose its sense even when its revenues do not exceed operating costs duringlong period of time, while functioning of any business in such circumstances is senseless.The category profit is derived from the category income. All cooperatives can beconditionally divided into 2 large groups. The first group is performed by the cooperatives whichreceive income from their members as a result of supplying them with the necessary goods andservices. The second group is performed by co-ops which receive income for their members as aresult of selling goods and services produced by these members. In the first case, the cooperativereceives income from its members, who are its owners at the same time. Therefore, according toits nature, this money looks more like targeted financing rather than income. Therefore, taxationis not logical here. In the second case, the cooperative receives income not for itself, but for itsmembers by selling their products. Therefore, it is logical to tax not the cooperative, but themembers of the cooperative individually. Thus, co-operatives providing services exclusively totheir members should not be taxed. If a cooperative is servicing the customers who are non-members, only this part of cooperative business must be taxed. The proposed theoretical approachhas been successfully used in Ukraine. The mentioned arguments allowed credit unions,agricultural servicing and housing cooperatives get the status of non-profit organizations. In theirturn, Ukrainian consumer cooperatives have not such a status because they serve the customerswho are not members.