Taxes are the lifeblood of a nation. It is through the payment of a taxes that the government earns revenue through which its agencies continue to operate, and with which the state provides public service to its constituents. Thus, it is a principle of law that any exemption from the payment of taxes can never be presumed and must strictly be construed against the taxpayer.
The Tax Code does provide exemption for certain persons, entities and transactions from the payment of income tax. Among the entities exempted from the payment of taxes are organizations not organized for profit, which are enumerated in Section 30 of the Tax Code. Another exemption is given for interest income arising from long term deposits or investments issued by banks to individuals, stated in Sections 24(B)(1) and 25(A)(2). Still another exemption from income tax is a general professional partnership (GPP) as stated under Section 26 of the same code. And there are special laws like Republic Act (RA) No. 7279 which allows for the exemption from income tax for private sector participants in the Socialized Housing Program. As we all know, the exemption from income tax equates to an exemption from withholding tax, since the tax withheld represents or approximates the income tax that would be or is due.
Early this year, the BIR released Revenue Memorandum Circular (RMC) No. 08-2014 which provided for an additional requirement for the continued enjoyment of income-tax exempt status.
RMC No. 08-2014 requires all individuals, entities and transactions considered exempt from income tax and consequently, withholding tax, to provide their withholding agents of a copy of their valid, current and subsisting tax exemption certificate or ruling which explicitly recognizes the grant of tax exemption. Failure to do so would subject the taxpayer to the payment of the appropriate tax due on the transaction and failure of the withholding agent to withhold notwithstanding the lack of a tax exemption or certificate would cause the latter to be liable for penalties under the Tax Code. The circular likewise stated that all other circulars or issuances inconsistent with “it” are revoked.
Given the sweeping language of the circular, the BIR received a deluge of requests for rulings and applications for tax exemption certificates from taxpayers all over the country who still wished to enjoy exemption from income tax and consequently, withholding tax. Some of these requests were from GPPs.
A GPP is defined in the Tax Code as a partnership 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.
Architectural, accounting and law firms are the most common forms of general professional partnerships in the Philippines. A GPP is different from a corporation and the usual business partnership basically because it is formed not for the purpose of trade or business, but for the purpose of allowing persons to exercise a common profession. Although exempted by the law from the payment of income tax, a GPP is still obligated to file an income tax return for administrative purposes. Hence, Section 26 of the Tax Code states that persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities. In fine, a GPP is not an income taxpayer as it is merely a mechanism or flow through entity used by the individual partners for the generation of income.
On July 24, 2014, the BIR responded to the requests (filed by GPPs) through the issuance of RMC No. 60-2014. This RMC clarifies that the requirement to present a tax exemption certificate or ruling pursuant to RMC No. 08-2014 does not apply to GPPs. Specifically, RMC No. 060-2014 referred to RMC No. 03-2012 as the basis for exempting GPPs from the requirement imposed under RMC No. 08-2014.
What is RMC No. 03-2012? This circular discusses the nature of GPPs, and the tax implications thereon. The circular invokes Section 26 of the Tax Code, and also cites Section 2.57.5 of Revenue Regulations (RR) No. 02-98, as amended, as an additional basis for the exemption of GPPs from the withholding of creditable withholding tax. Hence, in citing a specific provision of the Tax Code, in relation to the implementation of the same provision in a revenue regulation, RMC No. 03-2012 is not inconsistent with RMC No. 08-2014.
So are there other BIR issuances prior to 2014 that aren’t inconsistent with RMC No. 08-2014?
What about RMC No. 81-2012 (in relation to RMC No. 18-2011), which provides the conditions for income tax exemption for interest income arising from long term deposits or investments issued by banks to individuals? Clearly, Sections 24(B)(1) and 25(A)(2) of the Tax Code expressly mention this particular exemption from income tax. What about the enumeration of income payments not subject to withholding tax as provided under Section 2.57.2 of RR No. 02-98, as amended? Taking the issue a step further, isn’t there an enumeration of “no-ruling areas” in Revenue Bulletin No. 1-2003, dated July 13, 2003? If a particular income tax exemption falls under a “no-ruling area”, or at the very least, the law providing the exemption is so clear that the BIR need not exercise its ruling function, how can the taxpayer get a BIR ruling for the particular income tax exemption?
As unpaid withholding agents of the government, taxpayers are keen on following the issuances of the BIR to avoid the resulting penalties imposed for failure to withhold. Given the actual importance of being a withholding agent, the BIR should at least make the instructions to withholding agents as efficient and fair as possible. After all, the BIR is committed to the collection of taxes for nation-building through excellent, efficient and transparent service, just and fair enforcement of tax laws, uplifting the life of every Filipino. Hopefully, more clarifications will soon be released to explain the application of RMC No. 08-2014.
Monica D. Calimbas is a supervisor from the tax group of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International.
This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or RGM&Co. For comments or inquiries, please email ph-kpmgmla@kpmg.com or rgmanabat@kpmg.com.
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