Aranas Consunji Barleta Law Offices

June 18, 2009 BIR RULING [DA-(C-095) 306-09] 26; RR 6-2001; RMC 6-03; DA-(C-058)-197-08; DA-076-06; DA-432-06; UN-262-95; DA-(VAT-019)-336-08; DA-289-07 Aranas Consunji Barleta Law Offices Ground Floor, Le Metropole Building 326 Tordesillas St. cor. De La Costa St. Salcedo Village, Makati City Attention: Atty. Jesus Clint O. Aranas Gentlemen : This refers to your letter dated June 1, 2009 requesting for confirmation of opinion that the professional fees, including reimbursements for out-of-pocket expenses ("OPE"), received by your Firm, Aranas Consunji Barleta Law Offices (ACB Law), in relation to the legal services you render, are not subject to income tax and consequently to withholding tax. It is further requested that confirmation for the said OPE reimbursements are not subject to value-added tax (VAT). AECacS It appears that ACB Law is a general professional partnership duly registered with the Securities and Exchange Commission (SEC), and holds office at Ground Floor Le Metropole Building, 326 Tordesillas cor. De la Costa Sts., Salcedo Village, Makati City. It is established for the primary purpose of engaging in the practice of law, and is composed of partners and associates who are all members of the Philippine Bar. In consideration of its professional services, ACB Law charges its clients professional fees, plus OPE to cover photocopying, printing, transportation, communication, postage, per diem, office supplies, and other similar expenses that ACB Law incurred in the course of its engagement. In reply please be informed that: Section 26 of the 1997 Tax Code, as amended, provides as follows: "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." xxx xxx xxx This Office has consistently held that general professional partnerships are exempt from the imposition of withholding tax under Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001. (BIR Ruling No. DA (C-058)-197-08 dated September 5, 2008; BIR Ruling No. DA-191-08 dated March 24, 2008; BIR Ruling No. DA-049-08 dated January 29, 2008; BIR Ruling No. DA-462-07 dated August 21, 2007 and BIR Ruling No. DA-091-99 dated February 15, 1999] Nonetheless, persons engaging in the practice of their profession as partners in a general professional partnership shall be liable to 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. THEcAS Moreover, general professional partnerships are exempt from the imposition of withholding tax under Revenue Regulations No. 2-98. It is noteworthy to mention, however, 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 2.57.5 (B) (4) of Revenue Regulations (RR) No. 14-2002. (BIR Ruling No. DA-091-99 dated February 15, 1999) With respect to the reimbursements for OPE received by ACB Law, the same is not subject to income tax, withholding tax, and VAT, inasmuch as reimbursement of expenses by its very nature is not income but merely a return of capital. As a return of capital, it is not income payment per se and as such it is not subject to income tax. (BIR Ruling No. DA-076-06 dated March 3, 2006 and BIR Ruling No. DA-289-07 dated May 9, 2007). Considering that reimbursements are not income payments it should not therefore be subject to withholding tax prescribed under RR 2-98, as amended. This was confirmed by the BIR when it held, thus: "It has been a settled rule that reimbursement of cost is merely a return of capital and does not constitute income, and consequently, is not the proper subject of withholding taxes. " [BIR Ruling UN-262-95 dated July 11, 1995; BIR Ruling No. DA-432-06 dated July 18, 2006 citing BIR Ruling Nos. DA-489-05 dated December 6, 2005; DA-176-04 dated April 6, 2004; BIR Ruling No. DA-438-03 dated December 4, 2003 citing BIR Ruling Nos. DA-158-97 dated April 14, 1997; UN-262-95 dated July 11, 1995 and 245-95 dated July 5, 1995]. (Emphasis supplied.) ESacHC Being mere reimbursements, without any mark-up or profit, such amounts for OPE are also not subject to VAT. [Revenue Memorandum Circular (RMC) No. 6-03 dated January 15, 2003; BIR Ruling UN-262-95; BIR Ruling No. DA-(VAT-019) 336-08 dated October 23, 2008; BIR Ruling No. DA-362-08 dated June 13, 2008; BIR Ruling No. DA-076-06 dated March 3, 2006; BIR Ruling No. DA-289-07 dated May 9, 2007]. In this regard, the Supreme Court in the case of Commissioner of Internal Revenue vs. Tours Specialists, Inc., G.R. No. 66416 dated March 21, 1990 citing Commissioner of Internal Revenue vs. Manila Jockey Club, Inc. , G.R. No. L-13890 dated June 30, 2006, has held as follows: "As demonstrated in the above-mentioned [Manila Jockey] case, gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit ; and it is not necessary that there must be a law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax Code. (Underscoring and emphasis supplied) Based on the foregoing, the professional fees that your Firm had received, including the reimbursements for OPE, in relation to the legal services you have rendered to your clients, are not subject to income tax and consequently to withholding tax and VAT. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service