Bureau of Local Government Finance Opinion

February 11, 2015 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Benjamin B. Bernardino President Integrated Bar of the Philippines Rizal Chapter 4/F IBP National Office 15 J. Vargas Avenue Ortigas Center, Pasig City Sir : This refers to your letter dated 30 January 2015 requesting for guidance and clarification regarding the taxability of General Professional Partnerships (GPPs) formed for the exercise of your legal profession, particularly on the matter of local business taxes being imposed by local government units. It was pointed out that the Integrated Bar of the Philippines (IBP) has already been earlier favoured with a ruling on the matter by the Department of Finance (DOF) embodied in a ruling dated April 11, 1998 issued by the then Acting Secretary Milwida M. Guevara, wherein the DOF held that a GPP is not subject to a local business tax as a contractor, viz. : "We are guided by the rules in income taxation, (which were also adopted in the Local Government Code), as well as the relevant rulings of the Supreme Court in making our clarification. "1. A GPP is not considered a corporation and is therefore not a taxable entity. This is well recognized in the definition of a corporation under Section 22(B) of the NIRC which is also adopted in Section 131(i) of the Local Government Code. The definition says: "The term corporation shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts, associations, or insurance companies, BUT DOES NOT INCLUDE GENERAL PROFESSIONAL PARTNERSHIP. . . (underscoring supplied). 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. "2. A GPP is not considered as a separate taxpayer from the partners. In Tan vs. del Rosario , G.R 109289, October 3, 1994, the Supreme Court ruled that: '. . . a general professional partnership, (unlike an ordinary business partnership which is treated as a corporation for income tax purposes and so is subject to the corporate income tax), is not itself an income taxpayer. The income tax is [not] imposed on the professional partnership, which is tax exempt, but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits . . .' AScHCD "3. The professionals which compose the GPP are subject to the individual income tax under the NIRC and the professional tax under the Local Government Code. Section 139 (b) of the said Code states that "such person who has paid the corresponding professional tax shall be entitled to practice his profession in any part of the Philippines without being subjected to any national or local tax, license, or fee for the practice of such profession." "In conclusion, it is clear that a GPP cannot be considered as a contractor which is subject to a local business tax since: 1) it is not a taxable entity; 2) no part of its income is derived from engaging in any trade or business; 3) the income tax or a local tax of a similar nature is imposed on the partners. "It is therefore held by the DOF that A GENERAL PROFESSIONAL PARTNERSHIPS IS NOT SUBJECT TO A LOCAL BUSINESS TAX AND OTHER FEES AS A CONTRACTOR. THE PARTNERS WHICH COMPOSE THE GPP ARE NOT ALSO SUBJECT TO A LOCAL BUSINESS TAX SINCE THEY ARE ALREADY SUBJECT TO ANOTHER LOCAL TAX, I.E. , THE PROFESSIONAL TAX." While IBP-Rizal Chapter respects the authority of local government units to exercise their own revenue-raising powers, such exercise should be consistent with the existing laws on taxation. It is claimed however that some law offices (constituted as GPPs for the purpose of exercising the legal profession) have been assessed by the City of Pasig with local business taxes. The lawyers who form part of said law offices are members of the Integrated Bar of the Philippines (IBP). It was stressed that it has been the consistent ruling of no less than the Supreme Court that the practice of law is not a business ( Bangco vs. Atty. Pablo S. Bernardo , A.C. No. 6328, June 13, 2012; Atty. Ismael G. Khan, Jr. vs. Atty. Simbillo , A.C. No. 5299, August 11, 2003). As ruled, lawyering is not a business but a profession in which duty to public service, not money, is the primary consideration ( Leticia Adrimsin vs. Atty. Rolando Javier , AC No. 2591, September 8, 2006; Gina Francisco vs. Portugal, AC No. 6155, March 14, 2006). Corollarily, GPPs formed for the purpose of exercising the legal profession are not considered engaged in business. This is, in fact, confirmed by the Local Government Code and the National Internal Revenue Code which both provide that a GPP is a partnership formed for the exercise of a common profession and does not derived income from any trade or business, to wit: ". . . General Professional Partnerships are partnerships formed by person for the sole purpose of exercising the common profession, no part of the income of which is derived from engaging in any trade or business." (See Sec. 22(b), National Internal Revenue Code & Sec. 133(i), Local Government Code.) It is further claimed that confusion may have been generated by a subsequent Opinion dated October 27, 2008 issued by then Executive Director Ma. Presentacion R. Montesa of the Bureau of Local Government Finance which states: AcICHD "In view thereof, the Mayor's permit fee may no longer be collected from professionals who are paying the professional tax like doctors, dentist or lawyers. However, if they maintain a clinic/office, the operation of such clinic/office shall be subject to the payment of the Mayor's permit fee, the business tax based on gross receipts, as well as regulatory fees or service charges imposed by the cities or municipalities under a duly enacted ordinance." Apparently, this could have been interpreted by the City of Pasig to mean that if a lawyer is maintaining an office, he is automatically subject to the local business tax. However, it was noted that the Opinion of Executive Director Montesa (dated October 27, 2008) cannot be construed as a reversal of the above categorical ruling of the DOF dated April 11, 1998 to the effect that GPPs are not subject to the local business tax as a contractor. On the contrary, Executive Director Montesa even affirmed that the practice of a profession does not make a professional liable for any local tax after payment of the professional tax, to wit: "1. The exemption of a professional from any national or local tax, license, or fee after payment of the professional tax is for the practice of his profession ." It is contended that this is in consonance with Section 139 of the LGC which clearly provides that upon payment of the corresponding professional tax, a person engaged in the practice of his profession is no longer subject to any other national or local tax, license or fee for the practice of such profession, to wit: "(b) Every person legally authorized to practice his profession shall pay professional tax to the province where he practice his profession or where he maintains his principal office in case he practices his profession in several places: Provided, however, that such person who has paid the corresponding professional tax shall be entitled to practice his profession in any part of the Philippines without being subjected to any other national or local tax, license, or fee for the practice of such profession." It is further contended that due to the nature of the exercise of the legal profession, it is necessary for all lawyers to maintain an office for their administrative and support staff, legal research and venue for client meetings. In fact, the Rules of court require all lawyers to have an official address ( i.e. , an office) for service of judicial notices, opposing counsel's pleadings and other documents (Rule 13, Section 6, Revised Rules of Court). Since the administrative office of a lawyer is but an incident to the exercise of his profession, the maintenance thereof cannot be considered as operating a business. In view of all foregoing, IBP-Rizal Chapter seeks affirmance of the Opinion dated April 11, 1998 issued by Acting Secretary Guevara to the effect that a general professional partnership engaged in the practice of the legal profession, is not subject to the local business tax imposed by the City of Pasig. In this connection, enclosed for your information and guidance is a copy of the 1st Indorsement dated January 23, 2015 addressed to the City Treasurer of Pasig City regarding the business taxes being collected from GPPs the pertinent portion of which is quoted as follows: TAIaHE "In view thereof, it is informed that as far as the tax liability of general professional partnership is concerned, the BLGF has consistently adopted the opinions, copy enclosed, rendered by the Department of Finance (DOF) as follows: 1. Letter dated April 11, 1998 of the then Acting Secretary of the DOF wherein it was held that: 1. A GPP is not considered a corporation and is therefore not a taxable entity; 2. A GPP is not considered a separate taxpayer from the partners; 3. The professionals which compose the GPP are subject to the individual income tax under the NIRC and the professional tax under the Local Government Code; and 4. In conclusion, it is clear that GPP cannot be considered as a contractor which is subject to a local business tax since: 1) it is not a taxable entity; 2) no part of its income is derived from engaging in any trace or business; 3) the income (tax) is imposed on the partners. 2. Letter dated December 6, 1999 of Secretary Edgardo B. Espiritu addressed to Dr. Flor S. Enriquez, President, Philippine Dental Association on the request for opinion on whether cities or municipalities may validly require dentists to secure a Mayor's Permit before they can practice their profession and whether a dental clinic may be taxed as a business establishment, it was held as follows: a) Such professional who has paid the corresponding professional tax to the province where he practices his profession shall be entitled to practice his profession in any part of the Philippines without being subjected to any other national or local tax, license or fee, including the Mayor's Permit or license fee, for the practice of such profession. b) As to dental clinics, they are established as a direct a consequence of the practice of the dental profession. They are, necessarily, for the exercise of such a profession. c) Therefore, to impose a graduated tax on a dental clinic on the premise that it is a "business establishment rendering or offering to render professional services" would be to impose a local tax on the practice of profession. This would be in contravention of the Local Government Code. "Accordingly, it is the view of this Bureau that said opinions still hold until such time that the same are modified or rescinded accordingly by the same administrative authority or by the Court of competent jurisdiction." We hope that this will clarify matters. cDHAES Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director