Tax liabilities of partnerships
It’s payback time on Monday, the last day for filing of income tax returns of employed and self-employed persons, estates and trusts for income earned last year.
As soon as the data from the field are collated, which may take a month, the Bureau of Internal Revenue would be able to figure out whether the biggest tax haul for the year would be sufficient to meet its revenue projections for 2012.
In quiet fashion, the BIR has set its sight on a group of taxpayers that is reputed to use its knowledge of tax regulations to deftly reduce, if not avoid, the payment of taxes: the professional partnerships.
Several months ago, the BIR made a big splash about the filing of tax evasion charges against several medical practitioners who refused or failed to issue receipts to their paying patients.
The “shame campaign” prompted the Philippine Medical Association to seek a dialogue with the BIR for the conduct of an information drive among its members to advise them on proper compliance with their tax responsibilities.
Either the campaign was effective or the thought of being criminally prosecuted was unnerving, but a remarkable rise in compliance with the receipt requirement among medical professionals has been noted.
Why take the risk? The unassuming patient may be an undercover BIR agent.
Exemption
The BIR, through Revenue Memorandum Circular No. 3-2012, has served notice that general professional partnerships are in its crosshairs.
These partnerships are “formed by persons for the sole purpose of exercising their common professions, no part of the income of which is derived from engaging in any trade or business.”
This business arrangement is common among lawyers, accountants, architects and engineers. Their standard investment is their talent or skills, and they are generally paid based on the amount of time they spend in attending to their client’s needs and the end result of their work.
The circular cited Sec. 26 of the National Internal Revenue Code which states that such partnerships are not subject to income tax for income earned in that capacity.
However, the people who comprise the partnership shall be liable for income tax in their separate and individual capacities. Meaning, as soon as the profits of the partnership are divided and remitted to them, they become liable for the income tax due for the money they received.
The partner concerned has to report “as gross income his distributive share, actually or constructively received, in the net income of the partnership.”
The “constructively received” income refers to money and other things of value the partner may have received from the partnership during the year, such as, transportation allowance, representation expenses, vacation privileges and other similar perks.
Withholding
Consistent with the income tax exemption, the circular also stated that the rules on creditable withholding tax are not applicable to payments by third parties to the partnership.
To illustrate, when a company engages the services of a musical band to perform before its customers during its anniversary, the company is obliged to deduct a certain percentage from the band’s talent fee and remit it to the BIR as the band’s creditable tax withholding.
In turn, the balance of the talent fee received by the band has to be reported by the latter in its income tax return for the applicable year.
Through the company’s report on the creditable tax withheld, the BIR can later check whether or not the band accurately declared the talent fee it received from the company.
If the figures submitted by the company and the band do not match, it means either one or both lied in their BIR reports. Whoever submitted the false information could find itself in serious legal trouble.
Considering the speed by which the BIR’s computers can seek out and compare the figures stored in its database, catching the party who failed to submit the correct data or otherwise fudged the numbers is a breeze, including the filing of tax evasion charges.
Reporting
In criminal cases, verbal testimony stands weakly against documentary evidence. Besides, under existing rules, electronically generated documents, e.g., computer printouts are, after compliance with certain authentication requirements, acceptable pieces of evidence.
The exemption of general professional partnerships from income tax and creditable tax withholding does not, however, mean that the BIR simply relies on the honesty (ugh!) or patriotism (double ugh!) of the taxpayers who derive income from their participation in such business entities.
Lest its intended target may have forgotten, the circular reminded them that, as early as 1998, it has put in place a mechanism that creates a paper trail for the income they receive from their partnerships.
The BIR cited Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 30-0, which provide that income payments made to the partners whether periodically or at the end of the taxable year, such as drawings, advances, sharings, allowances, stipends and the like, are subject to 15 percent creditable tax withholding if the payments for the current year exceed P720,000, and 10 percent if otherwise.
Two people could be held liable for violation of this rule—the partner who failed to accurately deduct, report and remit the tax withheld, and the partner who did not correctly declare the income he received.
(For feedback, please write to [email protected].)
