BIR Ruling [DA-490-06]

August 9, 2006 BIR RULING [DA-490-06] 26; DA 235-03 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty. Fulvio D. Dawilan Tax Partner Gentlemen : This refers to your letter dated May 19, 2006 stating that PunongBayan & Araullo (P&A) is a professional partnership duly formed, organized and existing under and by virtue of the laws of the Philippines; that it is registered with the Securities and Exchange Commission (SEC) as a partnership with SEC Registration No. P-43895; that P&A is composed of certified public accountants and is established principally for the general practice of public accounting, and such other activities as are incident and related thereto; that as a public accounting firm, P&A renders auditing and other allied and related activities to its clients; that in the ordinary course of its business, P&A receives professional fees from the services rendered to its clients; and that other income may also be earned as an incident to its operations, such as proceeds from the sale of assets no longer used in business. In connection therewith, you now request an opinion that the professional fees derived by P&A from its clients, as well as proceeds from the sale or transfer of properties, are not subject to withholding tax. In reply thereto, please be informed that pursuant to Section 26 of the Tax Code of 1997, general professional partnerships are not subject to income tax imposed under Chapter III, Title II of the said Code. However, persons engaging in the practice of their profession as partners in a general professional partnership shall be liable for income tax in their separate and individual capacities. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership. For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. Moreover, general professional partnership are exempt from the imposition of withholding tax under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001. However, it is worth mentioning 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, sharing, allowances, stipends and the like, are subject to the 10% creditable withholding tax pursuant to Section 2.57.2(H) of Revenue Regulations No. 2-98, as amended. SUCH BEING THE CASE, this Office holds that the income payments made to P&A, including proceeds from disposition of its properties, are not subject to income tax and consequently to withholding tax prescribed in Revenue Regulations No. 2-98, as amended. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. AECcTS Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service