TAXATION

FAR EASTERN UNIVERSITY – MANILA

INCOME TAX (PARTNERSHIP, CO-OWNERHSHIP & JOINT VENTURES (1801)

A. Important Pointers for General Professional Partnerships

1. General Professional Partnership

• General Professional Partnership – formed for the sole purpose of exercising a common profession, no part of the net
income of which is derived from engaging in any trade or business.
• Tax exempt, but required to file income tax return.

2. Liability of partners in general professional partnership

Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their
separate and individual capacities (Principle of Constructive Receipt).

3. General professional partnership required to file return

Every general professional partnership shall file, in duplicate, a return of its income, except income exempt under the
Tax Code, setting forth the items of gross income and deductions and the names, TIN, addresses and shares of each of
the partners.

4. Manner of computing the net income of general professional partnership

For purposes of computing the distributive share of the partners, the net income of the general professional partnership
shall be computed in the same manner as a corporation.

5. Basis of the income that a partner will report

Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of
the partnership.

6. Income payments to partners of a general professional partnership subject to creditable withholding tax
Income payments to partners of general professional partnership are subject are subject 8% creditable withholding
tax

B. Computation of Distributive Share in the net income of a GPP

Gross income xxx

Allowable deductions (xxx)
Net income xxx
Other tax exempt income xxx
Income subject to final taxes (net) xxx
DISTRIBUTABLE INCOME of the partnership xxx
x P/L ratio of a partner %
DISTRIBUTIVE SHARE OF A PARTNER xxx*

*Inasmuch as the general professional partnership is only a “pass-through” entity, the passive income that has been
subjected to final taxes shall not anymore be included in the taxable distributive share of each of the partners.

C. Allowable Deductions of Partners of General Professional Partnerships

• For purposes of computing the distributive share of the partners, the net income of a GPP shall be computed in the
same manner as a corporation.
• Under the RR 2-2010, the type of deduction used by the GPP must be the same type of deduction availed of by the
partners.

1. GPP uses itemized deductions

If the GPP chooses itemized deductions, the partners comprising it must also claim itemized deductions. Nonetheless,

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 a partner may still claimed itemized deduction from his share in income of a GPP, provided, that, in claiming itemized
deductions, the partner is precluded from claiming the same expenses already claimed by the GPP. Moreover, it can
only claim deductions which are in the nature of ordinary and necessary expenses for the practice of profession that
were “not claimed by the GPP” during the year. Examples:
a. Representation expenses incurred by the partner where the covering receipt or invoice is issued in his name.
b. Travelling expenses while away from home which were not liquidated by the partnership.
c. Depreciation of a car used in the practice of profession where said car is registered in the name of the partner.

2. GPP uses OSD

If the GPP avails of the OSD in computing its net income, the partners can no longer claim further deductions from
their share in the net income of the GPP because OSD is a “proxy” for “all” items of deductions allowed to both the
GPP and the “partners”. Hence, the three examples of expenses by a partner show above (representation, travelling and
depreciation expenses) are no longer allowed as a “further deduction” by the partner(s) in case the GPP chooses OSD.

3. Conditions for deductibility of partner’s expenses

A partner can claim only itemized deductions from his share in the net income of a GPP, provided that the GPP also
uses itemized deductions in computing distributive net income.

The partner’s distributive share in the GPP is treated as his gross income, not his gross sales/receipts and the 40% OSD
allowed to individual is specifically mandated to be deducted not from his gross income but from his gross
sales/receipts; and

Also the partner cannot us itemized deduction when the GPP uses OSD since OSD is proxy to all claimable deductions.
The OSD of the partnership is presumed to cover the deductible expenses of the GPP including those of the
partners because the GPP is merely a pass through entity.

4. The rules indicated above are summarized in the following matrix:

Type of deduction claimed by the partnership May be claimed by the partner in
in computing net income computing his taxable income
1. Itemized deductions Itemized deductions only
2. OSD Neither itemized nor OSD

In the case of a corporation subject to tax under Sections 27(A) and 28(A)(1), it may elect a standard deduction
in an amount not exceeding forty percent (40%) of its gross income as defined in Section 32 of this Code.

Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be
considered as having availed himself of the deductions allowed in the preceding Subsections. Such election
when made in the return shall be irrevocable for the taxable year for which the return is made: Provided, That
an individual who is entitled to and claimed for the optional standard deduction shall not be required to submit
with his tax return such financial statements otherwise required under this Code: Provided, further, That a
general professional partnership and the partners comprising such partnership may avail of the
optional standard deduction only once, either by the general professional partnership or the partners
comprising the partnership: Provided, finally, That except when the Commissioner otherwise permits, the
said individual shall keep such records pertaining to his gross sales or gross receipts, or the said corporation
shall keep such records pertaining to his gross income as defined in Section 32 of this Code during the taxable
year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.

“Notwithstanding the provisions of the preceding Subsections, x

D. Important Pointers for General Partnerships

1. Taxable partnership required to file cumulative declaration and annual return

• Taxable partnership are required to file a cumulative quarterly declaration and a final return just like corporations.
• All other partnership, no matter how created or organized are considered corporation subject to corporate income
tax (30%)
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 2. Share of partner in a taxable partnership to final tax
The share of partners in the net income of a taxable partnership shall be subject to 10% final tax

E. Computation of Distributive Share in the net income of a GP (Taxable Partnership)

Gross income xxx

Allowable deductions (xxx)
Net income xxx
Less: Corporate tax (xxx)
Net income after corporate tax xxx
Other tax exempt income xxx
Income subject to final taxes (net) xxx
DISTRIBUTABLE INCOME of the partnership Xxx
x P/L ratio of a partner %
DISTRIBUTIVE SHARE OF A PARTNER xxx*

*The net income for distribution that will be subject to final tax should include all income subjected to final taxes inasmuch as the
commercial partnership is not a “pass-through” entity. The dividend income received by a partnership is exempt from income tax.

F. Important Pointer for Joint Ventures

1. Definition: Joint Ventures

This is a business entity owned, operated, and jointly controlled by small groups of investor as a separate and specific
business project organized for the mutual benefit of the ownership group.

2. Joint venture or consortium

Generally, is taxable as corporation.

3. Exempt Joint Ventures: Pursuant to an operating or consortium agreement under a service contract with the
Government (non-taxable)
a. Joint venture undertaking construction project
b. Joint venture engaging in petroleum, coal, geothermal and other entry operations
c. Exempt joint ventures

(RR NO. 10-2012) A joint venture or consortium formed for the purpose of undertaking construction projects not
considered as corporation under Sec 22 of the NIRC of 1997 as amended, should be:
a. Undertaking of a construction project; and
b.Should involve joining or pooling of resources by licensed local contracts; Licensed as general contractor by the Philippine
Contractors Accreditation Board (PCAB) of the Department of Trade and Industry (DTI);
c. Local contractors are engaged in construction business; and
d. The Joint Venture itself must likewise be duly licensed as such by the Philippine Contractors Accreditation Board
(PCAB) of the Department of Trade and Industry (DTI).

Taxable only if: absent any one of the aforesaid requirements, the joint venture or consortium formed for the
purpose of undertaking construction projects shall be considered as taxable corporations.

In addition, the tax-exempt joint venture or consortium as herein defined shall not include those who are mere suppliers of
goods, services or capital to a construction project.

The member to a Joint Venture not taxable as corporation each shall be responsible in reporting and paying appropriate income taxes on their
respective share to the joint ventures profit.

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 4. Joint ventures involving foreign contractors
May also be treated as a non-taxable corporation only if the member foreign contractor is covered by:
a. A special license as contractor by the Philippine Contractors Accreditation Board (PCAB) of the Department of Trade and Industry
(DTI);
b. The construction project is certified by the appropriate Tendering Agency (government office) that the project is a
foreign financed/ internationally-funded project and that international bidding is allowed under the Bilateral Agreement entered into by
and between the Philippine Government and the foreign / international financing institution pursuant to the implementing rules and
regulations of Republic Act No. 4566 otherwise known as Contractor’s License Law.

G. Tax treatment of the co-venturer’s share in the joint venture profit

1. Taxable Joint Venture
2. Non-taxable Joint Venture
Corporate co-venturer
The share in a taxable joint ventures net
income is treated as inter-corporate
dividend which is generally exempt from
income tax.
The share in a non-taxable joint venture's
net income is subject to corporate income
tax (30% normal tax)
Individual co-venturer
The share of individual co-venturer, it
is subject to 10% final tax.
The share of individual co-venturer is
subject to (regular income tax)

H. Important Pointer for Co-Ownerships

1. Definition: Co-Ownership
When two or more heirs or beneficiaries inherit an undivided property from a decedent, or when a donor makes a gift of an
undivided property in favor of two or more donees

2. Exempt from income tax

If the activities of the co-owners are limited to the preservation of the property and collection of income therefrom

3. Taxable as a corporation
If the co-owners make contribution of efforts, or new capital, if the co-ownership income is invested

4. Income to be reported by co-owners

Co-owners shall report in their respective income tax returns their shares of the income of the co-ownership

5. When may the co-owners be subject to tax

When the income of the co-ownership is invested by the co-owners in business or other income producing properties, the
co-owners will be subject to tax as a corporation because the co-owners have constituted themselves into a partnership

6. Co-owners not to be automatically considered as partners

Co-owners who own inherited properties which produce income should not automatically be considered as partners of an
unregistered partnership or corporation subject to income tax

7. Sharing of gross returns does not of itself establish a partnership

The sharing of gross return does not of itself establish a partnership, whether or not the persons sharing them have a joint
or common right or interest in any property from which the returns are derived. There must be an unmistakable intention
to form a partnership or joint venture

8. Property should be considered as owned by an unregistered partnership property

a. Inherited property remained undivided for more than 10 years and no attempt was ever made to divide the same among the
co-heirs;
b. Nor was the property under administration proceedings nor held in trust.

Exercises

1. X and Y formed a partnership with profit and loss sharing of 60% and 40%, respectively. The summary of the
partnership’s income and expenses during the year are as follows:
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Net income from operation P1,400,000
Other income, not subjected to final tax 200,000
Interest income, net of 20% final tax 80,000

Required:
a.If the partnership is a general professional partnership, how much is the income tax due and payable per ITR of the
partnership?
b. If the partnership is general professional partnership, how much is the income tax still due and payable of partners
X and Y per ITR, assuming that the creditable withholding tax has been withheld and remitted to the BIR?
c. If the partnership is a commercial partnership, how much is the income tax due and payable per ITR of the
partnership?
d. If the partnership is a commercial partnership, how much is the final taxes on the respective profit share of partner
X and partner Y?

2. X Co. and Y Co., both domestic corporations, form a joint venture to construct a building with a contract price
including 12% VAT amounting to P112,000,000. The total cost of construction amounted to P72,800,000 including
12% VAT. Operating expenses related to the joint venture amounted to P15,000,000. The corporations agreed to
share any income or losses equally.

Required: Compute the related taxes of the joint venture and the joint venture partners assuming that the
construction is
a. Not government project
b. A government project

3: Co-ownership (Preservation of the property)

A and B are co-owners by virtue of a property given to them by their father.

The co-ownership had a gross rental income of P500,000 and expenses related to rental activity of P300,000 but
10% is non-deductible for the year 20X1.

A and B share in the profits at 75% and 25%, respectively. A withdrew P50,000 from the co-ownership net income
for the year, B did not withdraw any amount. A and B are both single.

Required:
a. The income tax liability of the co-ownership
b. The taxable income of A before exemption

4: Co-ownership (Taxable as a Corporation)

In 1989, Kathy Ann Sabado and Grace Lingo received a plantation from their aunt, Katrina Halili. The cousins
continued to maintain the plantation.

In 201A, the net income of the plantation is P5,000,000 of which P1,000,000 each was received by Grace before
deducting the applicable withholding tax

Required:
a. What is the amount of income tax due and payable of the ownership?
b. What is the amount of the final income tax withheld from the share of Grace?
c. What is the amount of the income tax due and payable if Grace per ITR?

Determination of the Optional Standard Deduction for General Professional Partnerships (GPPs) and
Partners of GPPs.

GPP is not subject to income tax imposed pursuant to Sec. 26 of the Tax Code, as amended. However, the partners
shall be liable to pay income tax on their separate and individual capacities for their respective distributive share in
the net income of the GPP.

The GPP is not a taxable entity for income tax purposes since it is only acting as a “pass-through” entity where its
income is ultimately taxed to the partners comprising it. Section 26 of the Tax Code, as amended, likewise provides
that- “For purposes of computing the distributive share of the partners, the net income of the GPP shall be computed
in the same manner as a corporation.” As such, a GPP may claim either the itemized deductions allowed under Section
34 of the Code or in lieu thereof, it can opt to avail of the OSD allowed to corporations in claiming the deductions in
an amount not exceeding forty percent (40 %) of its gross income.

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In computing taxable income defined under Section 31 of the Tax code, as amended, the following may be allowed as
deductions:
a. itemized expenses which are ordinary and necessary, incurred or paid for the practice of Profession; OR
b. Optional Standard Deduction (OSD).

The distributable net income of the partnership may be determined by claiming either itemized deductions or OSD.
The share in the net income of the partnership, actually or constructively received, shall be reported as taxable
income of each partner. The partners comprising the GPP can no longer claim further deduction from their distributive
share in the net income of the GPP and are not allowed to avail of the 8% income tax rate option since their
distributive share from the GPP is already net of cost and expenses.

If the partner also derives other income from trade, business or practice of profession apart and distinct from his
share in the net income of the GPP, the deduction that he can claim from his other income would either be OSD or
itemized deductions.

PROBLEMS
Problem 1: Mr. JMLH is a partner of AMBS & Co., a general professional partnership (used OSD), and owns 25%
interest. The gross receipts of AMBS & Co. amounted to ₱10,000,000.00 for taxable year 2018. The recorded cost of
service and operating expenses of AMBS & Co. were ₱2,750,000.00 and ₱1,500,000.00, respectively.
Required: Compute income tax payable.

Notes:
* There is no income tax liability for AMBS & Co. since it is a general professional partnership under Section 26 of the
Tax Code, as amended.
* The GPP elected OSD in the computation of its net income and its election is irrevocable for the taxable year for
which the return is made'
* The GPP is liable to business tax.
* Individual partner is not allowed to claim further deduction from his distributive share since this is already net of
cost and expenses.
* Taxpayer is not allowed to avail of the 8%o income tax rate option since their distributive share from GPP is already
net of cost and expenses.

Problem 2: Ms. GEAL is a partner of CCF & Co., a general professional partnership (used itemized deductions), and
owns 25% interest. The gross receipts of CCF & Co. amounted to ₱10,000,000.00 for taxable year 2018. The recorded
cost of service and operating expenses of CCF & Co. were ₱2,750,000.00 and ₱1,500,000.00, respectively.
Required: Compute income tax payable.

Notes:
* There is no income tax liability for CCF & Co. being a general professional partnership under Section 26 of the Tax
Code, as amended'
* The GPP elected itemized deduction in the computation of its net income and its election is irrevocable for the
taxable year for which the return is made.
* The GPP is liable to business tax.
* Individual Partner is not allowed any deduction on his distributive share since this is already net of cost and
expenses'
* Taxpayer is not allowed to avail of the 8olo income tax rate option since her distributive share from GPP is already
net of cost and expenses.

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