Tax Articles

General Professional Partnerships:
Local Business Tax

By Atty. Fulvio D. Dawilan

A province or city may impose an annual professional tax upon a person engaged in the exercise or practice of his profession requiring government examination. Such tax shall be paid to the province or city where the professional practices his profession or in case he practices his procession in several places, to the place where he maintains his principal office. The payment of this professional tax entitles the professional to practice in any part of the country without being subjected to any other national or local tax, license, or fee for the practice of his profession.

There is no argument that professionals are subject to the annual professional tax. But the payment of the annual professional tax entitles them to exemption from other taxes for the practice of the profession.

The exemption of professionals from other local taxes is further reinforced by the definition of “contractors”. A “contractor” includes persons, natural or juridical, not subject to professional tax, whose activity consists essentially of the sale of all kinds of services for a fee. For purposes of local taxation, contractors or those engaged in the business of providing services exclude those subject to professional taxes. Clearly, persons who are subject to professional taxes are not included in the term contractor. Hence, they are not subject to the local business tax imposed on contractors or businesses providing services.

These rules are all provided in the Local Government Code (LGC). Some local government units (LGUs) though still attempt to impose tax on professionals in addition to the annual professional tax. In fact, there are a number of local revenue codes that include specific provisions on the taxation of professionals. There are also local revenue codes which recognize the said provisions based what is provided in the LGC, and yet the local treasurers disregard them.

While the exemption from local taxation of professionals are clear, there seems to be confusion on its implementation. To address the improper imposition and collection of taxes, fees and charges on professionals, Local Finance Circular No. 001-2019 was issued by the Department of Finance. This circular reflects that of the LGC with more detailed guidelines.

With the professionals subject only to the annual professional tax and exempt from all other local taxes, fees and charges, does this extend to a general professional partnership?

Aside from the usual business partnership, two or more persons may also form a partnership for the exercise of a profession. (Art. 1767, New Civil Code of the Philippines) This type of partnership is called general professional partnership. “General professional partnership” is defined in the LGC as 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.

For taxation purposes, partners of general professional partnerships are subject to taxes in their individual capacities. And provided that the partners are paying professional taxes, they are not subject to local taxes. This was the recent pronouncement of the Court of Tax Appeals.

In that case (CTA AC No. 247, September 16, 2022), a partnership composed of architects was issued an assessment for local business tax by the city treasurer on fees received by them from architectural services. The assessment was made despite the fact that the partners of the said firm have been paying their professional taxes in their individual capacities. Likewise, they were not engaged in any trade or business other than the general practice of architecture as a profession. The Court of Tax Appeals confirmed the decision of the Regional Trial Court that the firm is a general professional partnership, and as such, it is exempt from local taxes.

This and other similar earlier pronouncements should provide enough bases for local government units to stop imposing local taxes, fees and other charges on general professional partnerships. LGUs need to check compliance only with the payment of annual professional tax by the members of the firm. LGUs may also check if a firm is engaged in other business activities that do not constitute the practice of their professions. But even in the latter case, tax should not extend to the revenues derived from the practice of profession but only to the revenues derived from other activities.

The power granted to LGUs to create their sources of revenues is not a blank authority to impose tax on any subject at will. This is subject to the limitations provided by the grantor. That includes the limitations to impose tax to professionals and to the general professional partnerships to which they belong.