Bureau of Local Government Finance Opinion

February 5, 2015 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Jacinto R. De La Rosa, Jr. Founding Partner DE LA ROSA & NOGRALES LAW OFFICE 22nd Floor, West Tower Philippine Stock Exchange Centre Exchange Road Ortigas Center, Pasig City Sir : This refers to your letter dated January 26, 2015 seeking confirmation that your law firm, DE LA ROSA & NOGRALES LAW OFFICE, a General Professional Partnership formed for the sole purpose of exercising legal profession, is not subject to local business tax. The City Treasurer of Pasig issued DE LA ROSA & NOGRALES LAW OFFICE (Law Office, for brevity) a Notice of Assessment dated December 1, 2014 informing that your Law Office has a business tax deficiency based on the alleged undeclared taxable revenues for 2010 to 2014. The City Treasurer of Pasig considered DE LA ROSA & NOGRALES LAW OFFICE as a contractor under Chapter 4, Section 19 of the Pasig Revenue Code which authorizes the imposition of an annual tax on businesses. However, it is clarified that DE LA ROSA & NOGRALES LAW OFFICE is a General Professional Partnership (GPP) engaged purely in the practice of law. As such, it is not engaged in any business, trade or commercial activity. It is jurisprudentially settled that the practice of law is a profession and not a business. The said clarification is in fact confirmed by the law itself, specifically under Sec. 131 (i) of the Local Government Code of 1991 and Sec. 22 (b) of the National Internal Revenue Code which states that ". . . 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 ." (Underscoring supplied) As further represented in your letter, the Department of Finance (DOF) in its ruling dated April 11, 1998 addressed to the Integrated Bar of the Philippines and the Philippine Bar Association, it was held that "a GPP cannot be considered a contractor which is subject to local business tax because: 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". CAIHTE This Bureau under a 1st Indorsement dated January 23, 2015 addressed to the city Treasurer of Pasig, copy attached, has consistently adopted the said ruling of the DOF. The pertinent portion of which are quoted hereunder: 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, 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. As regards the letter dated October 27, 2008 addressed to Atty. MANALOTO, it may be clarified that what is being taxed and regulated is not the professional itself but the office being maintained as viewed from the principle of a juridical person created by law and recognized as a legal entity having distinct identity, legal personality and has duties and rights separate from its owner. Thus, if a professional 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 in view of Section 147, and in relation to Section 151 in case of cities, of the LGC, quoted as follows: " SEC. 147. Fees and Charges. The municipality may impose and collect such reasonable fees and charges on business and occupation and, except as reserved to the province in Section 139 of this Code, on the practice of any profession or calling, commensurate with the cost of regulation, inspection and licensing before any person may engage in such business or occupation, or practice such profession or calling ." (Emphasis ours) DETACa As regards the reclassification of GPPs from Administrative Offices to Service Contractors, it bears emphasis that said reclassification is not the basis for imposing business tax to GPPs. As cited in DOF opinion dated April 11, 1998, 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 in the form of "professional tax". In view thereof, it may be worth quoting the definition of the term "corporation" both under Section (B) of R.A. No. 8424, also known as the Tax Reform Act of 1997, which was adopted in toto in Section 131 (i) of the LGC, thus: " Section 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) , association, 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 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." We hope that this will help clarify matters. Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director