Du-Baladad and Associates

July 15, 2010 BIR RULING [DA-(C-028) 122-10] Section 26; Rev. Regs. 2-98, as amended; BIR Ruling No. 439-88; DA-490-06; DA-(C-058) 197-08 Du-Baladad and Associates 20th Floor, Chatham House Herrera cor. Valero Streets 1227 Makati City, Philippines Attention: Atty. Benedicta Du-Baladad Managing Partner Gentlemen : This refers to your letter dated November 12, 2009 requesting confirmation of your opinion that income payments made to DU-BALADAD AND ASSOCIATES, doing business under the name and style of BDB Law, in consideration for professional services including proceeds from disposition of its properties no longer used in business, are not subject to income tax and consequently, to creditable withholding taxes. It is represented that DU-BALADAD AND ASSOCIATES ( BDB Law ) is a general professional partnership duly formed, organized and existing under and by virtue of the laws of the Philippines, with Taxpayers Identification Number 241-924-734-001 and registered with the Securities and Exchange Commission (SEC) as a partnership with SEC Registration No. PP200517675. Its principal place of business is located at the 19th Floor, Tower 1, The Enterprise Center, 6766 Ayala Avenue, Makati City. It is further represented that BDB Law is composed of lawyers and established principally for the general practice of law. As a law firm, BDB Law renders legal and other allied and related activities to its clients. Thus, BDB Law, in the ordinary course of its business, receives professional fees from the services rendered to its clients. It is finally represented that, as an incident thereto, BDB Law may have to dispose of assets no longer used in its practice resulting in other income being earned. DaACIH In reply thereto, please be informed that Section 26 of the 1997 Tax Code, as amended, provides that: "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 their separate and individual capacities. 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. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership." In relation thereto, Section 2.57.5 of Revenue Regulations No. 2-98, as amended, provides that: "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: (A) . . . (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: (1) . . . (4) General Professional Partnerships (Emphasis supplied) xxx xxx xxx" Clearly, a general professional partnership shall not be subject to income tax since it is the individual partners who shall be subject to income tax in their separate and individual capacities. A general professional partnership is defined in Section 22 (B) of the 1997 Tax Code, as amended, as follows: "SEC. 22. Definitions. When used in this Title: (A) . . . (B) The term 'corporation' shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion) , associations, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. 'General professional partnerships' 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 . (Emphasis Supplied) xxx xxx xxx" Relative thereto, income earned from the disposition of assets no longer used in a law firm's practice shall not be considered as earned from engaging in any trade or business considering that such disposition is an isolated transaction and a mere incident or a necessary consequence of its operations. Provided that no part of its income is derived from engaging in any trade or business, BDB Law is a general professional partnership engaged in the practice of law. aDcHIC As such, income earned by BDB Law in consideration for its professional services, as well as income earned from the disposition of assets no longer used in its practice, are not subject to income tax and consequently, to creditable withholding taxes. (BIR Ruling No. 439-88; BIR Ruling DA-490-06 dated August 9, 2006; BIR Ruling [DA-(C-058) 197-08] dated September 5, 2008) Accordingly, it is the individual partners that shall be subject to income tax, and consequently, to withholding tax, in their separate and individual capacities pursuant to Section 26 of the 1997 Tax Code, as amended. Furthermore, each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner