BIR Ruling [DA-283-06]

April 26, 2006 BIR RULING [DA-283-06] R.R. 2-98 & R.R. 30-03 BIR Ruling No. DA-047-00 Ms. Marcela L. Chua 864 Alvarado St. Rm. 614, Ligaya Bldg. Binondo, Manila M a d a m : This refers to your letter dated May 30, 2005 requesting for a clarificatory ruling on certain issues in order to settle differences in opinion with an examiner. We rule on the issues raised for our consideration. Q: Is the managing partner entitled to monthly salary? A: Whether or not a managing partner is entitled to monthly salary would depend on the partnership agreement. Partnership agreements provide certain provisions affecting partner's salaries, profit and loss sharing, interest on capital, other allowances and other matters which may have tax consequences. An individual who performs services for a partnership is an employee. but whether the relationship of employer (partnership) and employee (managing partner) exists which gives rise to payment of compensation, will in doubtful cases be determined upon an examination of the particular facts of each case. If the relationship of the employer and employee exists, the designation or description of the relationship by the parties as anything other than that of employer and employee is immaterial (Sec. 2.78.3, Revenue Regulations No. 2-98). Thus, if such relationship exists, it is of no consequence that the employee is designated as a partner, co-adventurer, agent or independent contractor (Section 5, Revenue Regulations No. 6-82, as amended) Q: How do we consider his/her salary claimed in recording the entry on the books of account? a. Shall it be considered as expense? b. Shall the salary be considered as distribution of income to the partner therefore not deductible as expense for tax purposes? A: Assuming that employer and employee relationship exists, the monthly salary of the managing partner is considered as an expense. Expenses chargeable against income are allowable in their entirety for business partnerships. General professional partnerships as defined under Section 22(B) of the Tax Code of 1997 and their individual partners can claim expenses subject to the provisions of Section 34 of the same Code (Revenue Administrative Memorandum Order No. 1-2000). EcDSTI In the case of general professional partnerships, Section 3 of Revenue Regulations (Rev. Regs.) No. 30-03 amending 2.57.2 of Rev. Regs. No. 2-98, as amended by Rev. Regs. No. 17-03 provides that income payments made periodically or at the end of the taxable year by a general professional partnership to the partners, such as drawings, advances, sharings, allowances, stipends, etc., are subject to fifteen percent (15%) creditable withholding tax if the income payments to the partner for the current year exceed PhP720,000.00 and ten percent (10%) if otherwise. For purposes of withholding, the payor should deduct and withhold the proper tax at the time the income payment is paid. Whether the tax imposable is 10% or 15% would be based on the sworn declaration which is filed on June 30 or within fifteen (15) days after the end of the month when the income payment reaches PhP720,000, whichever comes earlier. Nevertheless, a second disclosure should be filed when during the same taxable year income reaches PhP720,000. Failure to file the June 30 sworn declaration would subject the income payment to the higher rate of 15%. Please be guided accordingly. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service