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Taxing the professionals

KPMG CORNER By Eric B. Javeloza | Updated March 13, 2012 - 12:00am

The Bureau of Internal Revenue (BIR) recently issued Revenue Memorandum Circular No. 03-2012
(RMC 03-12) to remind BIR officials and taxpayers alike of the proper tax treatment of income payments
made to General Professional Partnerships (GPP), as well as the distributive shares of net profits
received by the partners from such GPPs.

GPPs, as defined by Section 22(B) of the National Internal Revenue Code (NIRC), as amended, 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. Under Sec. 2.57.5(B)(4) of Revenue
Regulation (RR) 2-98, as amended, payments made to GPPs in consideration of its professional services
are exempt from creditable withholding taxes.

On the other hand, when the GPP itself makes income payments to the partners, either periodically or at
the end of the taxable year, the same are subject to the creditable withholding tax under Sec. 2.57.2(H) of
RR 2-98 as amended by RR 30-03. These income payments include drawings, advances, sharings,
allowances, stipends, etc. This creditable withholding tax is imposed at the rate of 15 percent if the
income payments to the partner for the current year exceeds P720,000.00 and 10 percent if otherwise.

It is important to note that the above withholding tax on income payments by GPPs to its partners
is in the nature of creditable withholding taxes (CWT). Under the creditable withholding tax
system, the amounts withheld therein are merely intended to equal or at least approximate the tax
due on the item of income. The payee partner is still required to file an income tax return to
report the income and pay the difference between the tax withheld and the tax due, if any. CWTs
are different from final withholding taxes (FWT). Under the final withholding tax system, the
amount withheld constitutes full and final payment of the income tax due on the transaction.
Furthermore, the liability for payment of the tax due rests primarily on the payor as the
withholding agent and that payee is not required to file an income tax return for this particular
income item.

Under Sec. 2.57.2(H), the GPP is constituted as the withholding agent of the creditable withholding
tax therein. The failure to withhold on this particular item will not result to deficiency income tax, but to
deficiency withholding tax. This is because GPPs are not subject to income tax. Neither is the
distribution of net profits to the partners a proper deductible expense for the partnership. In addition to this
duty to withhold, the GPP must likewise properly record and substantiate the withholding itself. To
minimize the risk of deficiency withholding tax assessments, the GPP must properly record the
payment and withholding thereon in its Monthly Alphalist of Payees (MAP). The MAP is a required
attachment to the GPPs BIR Form 1601-E or the Monthly Remittance Return of Creditable Income Taxes
Withheld. BIR Form 1601-E is a required submission of the GPP to the BIR, as part of its reportorial
obligations under our tax laws.

On the part of the partner, while he/she receives his/her distributive share in the net profits of the
GPP net of the creditable withholding tax, he must still record the gross amount thereof as
income. This, in turn, should form part of his gross income for the taxable year. After deducting
therefrom the allowable deductions (if any) and additional exemptions, the resulting taxable
income should then be subjected to the applicable income tax rate for individuals under Section
24(A)(2) of the NIRC, to arrive at his income tax due. This amount should then be reduced by the
CWT previously withheld by the GPP to arrive at the partners income tax payable for the taxable

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The partner should demand from the GPP the issuance of BIR Form 2307 (Certificate of Creditable Tax Withheld at
Source). This document serves proof that the CWT the partner claims as deductions from his income tax due are
proper. Without this proof, the partner exposes himself to the risk of deficiency income tax assessments on the
amount of the unsubstantiated CWT claimed.

On a minor note, GPPs and the individual partners can avail of the Optional Standard Deduction (OSD) to minimize
the administrative burden of substantiating itemized deductions. Section 34(L) of the NIRC, as amended by R.A.
9504, provides that individuals and corporations (GPPs are taxed in the same manner as corporations) may avail of
the OSD at the rate of 40 percent of their gross receipt/sale/income.

The application of the OSD to GPPs and their partners are governed by RR 16-08 as amended by RR 02-10. Under
Sec. 7 of RR 16-08, an individual taxpayer (the partner) who is entitled to and claimed the OSD shall not be required
to submit with his tax return such financial statements otherwise required under the NIRC. This is echoed by the
guidelines and instructions to the new BIR Form No. 1701, when it states that an individual who opts to avail of the
OSD need not submit the Account Information Form (AIF)/Financial Statements.

As initially mentioned, RMC 03-2012 should be treated as an invitation by the BIR to taxpayers and tax officials alike
to revisit the existing tax rules on income received by GPPs and their constitutive partners. For both parties, an
understanding of these rules and compliance thereto is essential to minimize the risk of deficiency tax assessments,
penalties and surcharges. In light of the vigorous push by the BIR to improve its efficiency in tax collections,
minimizing the risk of penalties and surcharges are themselves tax saving mechanisms the taxpayer of today cannot
and should not do without.

The BIR cited Revenue Regulations No. 2-98, as amended by Revenue Regulations
No. 30-0, which provide that income payments made to the partners whether
periodically or at the end of the taxable year, such as drawings, advances, sharings,
allowances, stipends and the like, are subject to 15 percent creditable tax withholding
if the payments for the current year exceed P720,000, and 10 percent if otherwise.
Two people could be held liable for violation of this rulethe partner who failed to
accurately deduct, report and remit the tax withheld, and the partner who did not
correctly declare the income he received.



Distributive share of individual partners in a taxable 10%

partnership, association, joint account or joint venture

or consortium 10%