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Professional partnerships not subject to income taxes

GENERAL PROFESSIONAL partnerships (GPP) are not subject to income taxes and their corresponding creditable withholding taxes, the Bureau of Internal Revenue (BIR) reiterated in its latest issuance.

The bureau released Revenue Memorandum Circular No. 3-2012 setting the tax implications of a GPP, “partnerships formed by persons for the sole purpose of exercising their common profession.”

The most common forms of GPPs are accountancy firms, architectural firms and law firms.

While GPPs are not subject to income tax, partners will be liable instead “in their separate and individual capacities,” the issuance read.

“It is the individual partners who shall be subject to income tax, and consequently, to withholding tax...” based on their share in the GPP, the issuance continued.

Payments made by clients to GPPs for their professional services are likewise not subject to these taxes, it added.

GPPs, unlike corporations, are not separate taxable entities, Tammy H. Lipana, chairperson of the Philippine Chamber of Commerce and Industry tax committee, said in an interview last Friday. The BIR recognizes that GPPs are primarily formed because of the need to pool resources.

“GPPs are pass-through entities, that’s why it’s the partners that shoulder the income taxes,” Ms. Lipana explained.

“Partners are also usually active and exercise their profession, unlike shareholders in corporations,” she added.

Profits and tax liabilities are divided among partners depending on their share, Lina P. Figueroa, a principal at Punongbayan & Araullo, said.

When partners are given their drawings and advances per month, their withholding taxes are already taken from the payments.

The partners can use these credits for their quarterly and annual income tax returns, Ms. Figueroa explained. -- Diane Claire J. Jiao


(As published in BusinessWorld, 24 January 2012.)