Bureau of Local Government Finance Opinion

September 10, 2015 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Ms. Ma. Criselda S. Oplas Managing Partner Alas Oplas & Co. CPAs 25/F Philippine AXA Life Centre 1286 Sen. Gil Puyat Avenue Makati City 1200 Madam : This refers to your letter dated August 25, 2015 seeking clarification on the following issues: 1. Whether or not ALAS OPLAS & CO. CPAs (the Firm) is engaged in the practice of profession. 2. Whether or not being engaged in the practice of profession, ALAS OPLAS & CO. CPAs should be assessed or subjected to local business tax. It is represented that ALAS OPLAS & CO. CPAs is a General Professional Partnership (GPP) firm and its industry classification per record with the Securities and Exchange Commission (SEC) is "Accounting, Bookkeeping & Auditing Activities". As a GPP, ALAS OPLAS & CO. CPAs is composed of individual partners who are Certified Public Accountants engaged only to perform for clients financial audit services and hold itself out to the public as independent external auditor accredited by different accreditation agency of the government such as but not limited to the Board of Accountancy, Securities and Exchange Commission, Insurance Commission, Cooperative Development Authority and National Electrification Administration. The Firm hires employees who are also CPAs to conduct financial audit as independent external auditor or different clients subject to the jurisdiction and/or supervision of different accrediting bodies/agencies. It is claimed that the Firm denied of any authority to conduct external audit unless it is duly accredited by the competent accrediting agencies as mentioned above and its public practice of accounting is highly regulated, therefore, it is safe to say that it is engaged in the practice of profession. For several years since the Firm was established, the business classification in the record of the Business Permit and Licensing Office (BPLO) of Makati City is as a "Service Contractor" and it is annually subjected to and assessed as such for the payment of business tax. However, in 2014 the Firm learned from other audit and law firms like SGV & Co. that it should not be subjected to local business tax as it engages in the practice of its profession. Hence, the said request. To clarify the matter, the Firm informed the City Treasurer's Office to rectify the mistake but the City Treasurer's Office is definite in its stand that ALAS OPLAS & CO. CPAs is a "service contractor". In a letter dated August 18, 2015 addressed to that Office, Ms. Amalia C. Santos, OIC-City Treasurer of Makati informed on the present status of ALAS OPLAS & CO. CPAs as per the records obtaining in the City Treasurer's Office: 1. ALAS OPLAS & CO. CPAs applied for a business permit with the City of Makati as a "Service Contractor". 2. Based on computerized records, ALAS OPLAS & CO. CPAs have been annually renewing its business as a "Service Contractor" since 2003 to present. 3. It was only in 2014 that ALAS OPLAS & CO. CPAs questioned the taxability of its business. CAIHTE The City Treasurer argued in the said letter that a partnership is between two (2) individuals in a professional partnership in the practice of their profession and as such are liable to professional taxes. In this case since they are individually taxed, forming the partnership will automatically exempt the business from the payment of business tax. The City Treasurer further insisted that the idea of forming the partnership is a means of collating and expanding the clientele list of one partner by adding the clientele list of the other, thereby expanding the profit margin of the Firm as indicated in the documents submitted to the Treasurer's Office. In view of the above arguments and the attestations of the documents you submitted to the City Treasurer's Office, Ms. Santos is definite in its stand that the assessment on the local taxability of ALAS OPLAS & CO. CPAs is correct and therefore liable to pay business tax as a "Service Contractor". However, ALAS OPLAS & CO. CPAs believed otherwise since the Firm is composed of individual partners who are Certified Public Accountants engaged only to perform for clients' financial audit services and hold itself out to the public as independent external auditor accredited by different accreditation agencies stated above. It further cited that Chapter III Article A on Business Taxes of Makati City's City Ordinance No. 2004-A-025 also known as the Revised Makati Revenue Code did not expressly provide for those engaged in auditing as subject to local business tax. In this connection, it is informed that as far as the tax liability of general professional partnership is concerned, the BLGF had consistently adopted the ruling dated April 11, 1998 issued by the Department of Finance, the pertinent portion of which is hereby restated for emphasis: "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(1) 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 PARTNERSHIPS . . . (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 imposed on the professional partnership, which is tax exempt, but on the partners themselves in their individual capacity computed on their distributive shares of the partnership profits. . .' "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 Philippine 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 PARTNERSHIP 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." It bears emphasis however that a professional, who is a private practitioner and who has paid the professional tax may be considered exempt from the Mayor's permit fee before he could exercise his profession. However, if he is operating a business, say an office, a Mayor's permit fee should still be secured in order to operate said business which, furthermore, shall be subject to the tax on business, regulatory fees and service charges imposed by the local government concerned under a duly-enacted tax ordinance. It is emphasized that the above views are expressed based on the facts and information presented in the above letter dated August 25, 2015. However, if upon verification and investigation the same shall be proven to the contrary, then the views rendered herein shall be considered null and void. This Bureau further suggests that you make representation with the City Treasurer's Office to resolve the issue between ALAS OPLAS & CO. CPAs and the City Treasurer's Office. We hope that this will help clarify matters. Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director