Calculating net income from turnover with members of consumer cooperatives

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Under Norwegian tax law, companies have no legal basis for income deductions relating to the use of surpluses. This is because the use of company surpluses for the benefit of the owners should not affect the company’s taxable income.

 

However, for some cooperatives, such as consumer cooperatives, Section 10-50 opens up the possibility of deductions for the use of surpluses. This provision states that consumer cooperatives can claim deductions from their income for back payments to members under Section 27 of the Cooperatives Act. However, the deduction is subject to a maximum amount through deductions only being given from the enterprise's net income from turnover with members (“the Ceiling”). The direct link between the net income from turnover with members in consumer cooperatives and the income deduction on the company's part means that the interpretation of the term ‘income’ we are referring to here will be important from a practical perspective. 
 
In Section 10-50 of the Regulation pursuant to the Tax Act, the Directorate of Taxes has issued more detailed provisions concerning the way in which the enterprise's net income from turnover with members is to be calculated. For consumer cooperatives, the rule can be expressed using the following formula which is reproduced in section 10.3.3 on page 1101 of the Tax ABC 2015:

The enterprise’s net business income (100) x (multiplied by) Gross turnover with the cooperative's own members (80) / (divided by) the Enterprise's regular turnover (200)

Here, “the enterprise’s net business income’ means the cooperative’s total taxable income including any commission income, rental income, etc. This corresponds to taxable business income.

If you use the figures in parentheses, the net income from turnover with members in the example will be 40. For the year in question, the enterprise’s maximum deduction for back payments under Section 10-50 of the Tax Act will then be 40.

In connection with the application of the formula, it is necessary to decide what the enterprise's regular turnover amounts to. This interpretation has a direct impact on the enterprise’s calculated net income from turnover with members and therefore also the “Ceiling” for deductions for back payments.

In connection with this assessment, the Directorate of Taxes had the aim of finding a practical and legally enforceable definition of the terms used in the formula.

The starting point for the assessment is Section 10-50-4 of the Directorate of Taxes’ Regulation (FSSD). In connection with this, the Directorate has looked in more detail at Income Statement 2 (RF-1167) in order to see which item(s) in the enterprise's income statement can be said to form part of the enterprise's regular turnover.

When interpreting the term “the company's regular turnover” in Section 10-50-4 of the Directorate of Taxes’ Regulation, it is natural to look at the “principle of interaction”. This is a general principle in cooperative law which is based on the assumption that the distribution of the enterprise’s return in the form of back payments to members of the consumer cooperatives should correspond to the member’s trading with the cooperative. This principle is now set out in Sections 1 second paragraph and 27 first paragraph and is referred to in NOU 2002:6 Cooperatives Act, point 23.4.5 (and is referred to in Odelsting Proposition No. 21 (2006-2007) on the Cooperatives Act, point 5.1.1.).

For the reasons given above, the Directorate of Taxes concludes that the expression “the enterprise’s regular turnover” in Section 10-50-4 of FSSD must be interpreted in a broad sense, such that the result corresponds as closely as possible to the purpose of the special rules for the taxation of cooperatives. If a narrow interpretation had been used as a basis, it would, in the Directorate of Taxes’ view, have led to a system where too great a proportion of the enterprise's total net income would have been attributed to member turnover.

In line with a “broad” interpretation of the term, the Directorate of Taxes assumed that the following items in Income Statement 2 for 2010 would be included in “the enterprise's regular turnover” when calculating the enterprise's net income from turnover with members.

Item:

  • 3000 Sales revenues and withdrawals, taxable
  • 3100 Sales revenues and withdrawals, tax-free
  • 3200 Sales revenues and withdrawals outside the tax area
  • 3300 Special official taxes regarding sales
  • 3400 Public subsidies/refunds
  • 3500 Unearned income
  • 3600 Rental income from real property
  • 3695 Other rental income
  • 3700 Commission income
  • 3800 Profit from disposal of fixed assets
  • 3900 Other operations-related income

Unless the consumer cooperative follows IFRS, the abovementioned items will constitute all the items which must be aggregated under item 9000 “Total operating revenues” of Income Statement 2 in the context referred to here.

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