General professional partnership exempt from withholding tax. In this article, we shall discuss the same. The Bureau of Internal Revenue (BIR), in its Revenue Memorandum Circular No. 3-2012 (RMC), clarifies the tax consequences of General Professional Partnerships (“GPPs”).
Section 26 of the Tax Code1, as amended, exempts a general professional partnership from income tax. Persons who engage in business as partners in a general professional partnership, on the other hand, are solely responsible for income tax in their individual capacities.
Are general professional partnership exempt from withholding tax?
As a result of Revenue Regulations No. 2-98, general professional partnerships are exempted from the applicability of withholding tax. “General professional partnerships,” as defined by the Internal Revenue Code, are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business.2
On the other hand, individual partners will thus be subject to income tax and, as a result, withholding tax in their distinct and individual capacities. Furthermore, each partner must record as gross income his distributive portion of the partnership’s net income, whether received actually or constructively.
However, income payments made to partners by a general professional partnership on a regular basis or at the end of the taxable year, such as drawings, sharings, allowances, stipends, and the like, are subject to 15 percent withholding tax if the payments to the partner for the current year exceed P720,000; and 10 percent creditable withholding tax if the payments to the partner for the current year exceed P720,000, as per Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 30-2003.3
Why is general professional partnership not subject to withholding tax?
General professional partnerships are not subject to withholding tax because they are exempted from the imposition of income tax. Under Section 26 of the National Internal Revenue Code (NIRC) of 1997, as amended, a general professional partnership as such shall not be subject to income tax.
However, persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities, thus:4
“SEC. 26. Tax Liability of Members of General Professional Partnerships. – A general professional partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in the separate and individual capacities.5
“Each partner shall report as his gross income his distributive share, actually or constructively received, in the net income of the partnership.”7
Therefore, the law itself, Republic Act No. 8424 or the Comprehensive Tax Reform Program of 1997,8 declares that General Professional Partnerships shall not be liable for, or be subjected to the imposition of, income tax.
Since GPPs are income tax free entities under the law, the directive to withhold tax, such as Creditable Withholding Tax [CWT], shall not apply to General Professional Partnerships. The latter, as mentioned, are partnerships created by people for the express purpose of practicing their common profession, with no part of their revenue generated from operating in any trade or business.
Thus, Section 2.57.5 of Revenue Regulations No. 2-98 exempts general professional partnerships from the applicability of creditable withholding tax.
“In relation thereto, Section 2.57.5 of Revenue Regulations No. 2-98, as amended, provides that:9
“SECTION 2.57.5. Exemption from Withholding. — The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments made to the following:10
“(A) . . . .11
“(B) Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following:12
“(1) . . . .13
“(4) General Professional Partnerships14
“x x x x x x x x x”15
General Professional Partnership under Train Law
The General Professional Partnerships under the TRAIN [Tax Reform for Acceleration and Inclusion] Law16 are treated in similar manner as they were under the Comprehensive Tax Reform Program of 1997 or RA 8424. Hence, even after the advent of RA 10963, the applicability of Revenue Memorandum Circular No. 3-2012 is not affected.
A general professional partnership is a composition of individuals for common objective, whose partners or constituents are all professionals. It is important to note that GPPs are not limited to partnerships of lawyers, accountants, and engineers, but may also include doctors, nurses, dentists, teachers, and other professionals.
Attorneys may conceptualize a partnership between or among themselves. Upon agreement, they, thus, have created a general professional partnership engaged in the exercise of their legal profession.
The TRAIN Law, in not affecting Section 26 of RA 8424, hereby exempts, as well, GPPs from withholding tax on their gross income derived from their practice. This means that a GPP can receive its entire earnings without being subject to any withholding tax whatsoever.
President Rodrigo Duterte signed the Tax Reform for Acceleration and Inclusion (TRAIN) Law, or Republic Act No. 10963, into law on December 19, 2017 and took effect on on January 1, 2018 following its complete publication in the Official Gazette or in at least one (1) newspaper of general circulation, bringing numerous reforms to the Philippine tax system. The exemption from withholding tax on income transfers to General Professional Partnerships is one of the adjustments (GPPs). GPPs are any partnership for the exclusive purpose of practicing shared profession, with no part of their revenue coming from a trade or company.
To be considered as a GPP, the following requirements must be met:
- Only individuals who are members of the same profession may form a partnership
- The partnership is not allowed to engage in any trade or business
- The income derived by the partnership should only be from their practice of common profession
Income tax treatment and other tax obligations of GPPs. Under Section 22(B) of the Tax Code, as amended by Republic Act No. 10963 or TRAIN Law, gross income earned by GPPs shall be exempt from taxes, subject to certain conditions. The partners’ share in the net taxable income shall be subject to final withholding tax at the rates specified below:
Partners of general professional partnerships (GPP) do not receive salaries because what they receive from the GPP is their share of the net income of the GPP, which they receive through drawing, advances, sharing, allowances, stipends, and so on, and they are subject to 10% if the partner’s current gross income does not exceed P720,000; otherwise, 15% applies.
Are professional fees subject to withholding?
Withholding tax is one of the most important and significant taxes to be collected by the government. This is because it is the government’s way to ensure that, in the course of business transactions, income taxes will be withheld at source and remitted to the BIR as advance payments.
As a result of the tax reforms which RA 10963 has introduced in the Philippines, withholding tax on professional fees is now 5% of gross income if annual income does not exceed PhP3 million, otherwise, it is 10% of gross income for individuals and 10% of gross income for juridical entities if annual gross income or receipts does not exceed P720 thousand, otherwise 15%.
To apply the 5% or 10% tax, the payee individual or company is required to file tax returns with Bureau of Internal Revenue [BIR] not later than April 15 of the current taxable year.
Professional fees subject to extended withholding tax in the Philippines under TRAIN or RA 10963 cover payments to licensed professionals under the auspices of the Professional Regulation Commission [PRC], such as CPAs, medical practitioners, engineers, architects, and so on.
It also includes lawyers, professional entertainers, professional athletes, film and television directors and producers, insurance agents and adjusters, management and technical consultants, bookkeeping agents and agencies, other talent fee recipients, non-employee directors of corporations, and commissions of independent sales representatives and marketing agents.
The general professional partnership may be considered project of two or more persons to jointly engage in the exercise of their profession by reciprocal undertakings, contributions, and obligations. The concept is based on the idea of creating an entity which would combine the efforts, skills, and knowledge of each partner to derive profit or benefits from their collective efforts.
A general professional partnership is not a corporation and its members may not be held liable as shareholders directly and in their personal capacities for the liabilities and obligations of the corporation, be they tax responsibilities or otherwise. Nonetheless, GPPs may also be deemed an entity for purposes of taxation, except income tax.
GPPs are generally exempt from withholding taxes, as per Revenue Regulations No. 2-98, as amended and Revenue Regulations No. 3-2012. Nevertheless, Value Added Tax on GPP’s gross sales/receipts/income may be imposed, especially if it applies itself as a VAT-Registered entity upon creation and registration with appropriate government agency or it reached a maximum annual income as prescribed by law in order to be subjected to VAT.
The general professional partnership becomes an alternative to the existing forms of business entities in the country. It gives the professionals the avenues to practice their professions and earn income under a single firm or organization, in accordance with law.
- RA 8424
- Section 22[B], RA 8424
- Revenue Regulations No. 30-2003
- Revenue Memorandum Circular No. 3-2012
- RA 8424
- Revenue Memorandum Circular No. 3-2012
- Republic Act No. 10963