by Ali Naeem, Partner
It is an often debated issue whether freelance lawyers, advisors or consultants who work for law firms should be considered as carrying out a “business” as defined in the Business Profit Tax Act. The answer to this depends on the actual arrangement under which the lawyer operates, and the nature of the relationship the lawyer has with the law firm.
Tax Ruling TR-2018/B65 issued on 24 May 2018 sets out rules on the position of such individuals and requires the attention of lawyers and persons engaged in similar types of technical professions (working under various arrangements) because it, to a great extent, could impact their tax position and tax obligations.
The general understanding is that lawyers usually practice under one or more of the following arrangements:
Working at law firms
- As consultants for law firms where the remuneration is based on specific cases or projects assigned to them;
- As partners of law firms where the remuneration is based on the income they generate for the firm (this is in addition to the share of profit);
- As associates at law firms where the remuneration includes a fixed salary as well as a commission on the cases or assignments they work on.
- On retainer or a monthly fixed fee arrangement with their own clients;
- Self-employed without any affiliation with a law firm;
- As freelancers under a contract for service on specific projects with clients.
The BPT Act defines business very broadly, and any economic activity (except for employment income) generating income is considered to fall within that broad definition. It is debatable whether a certain individual has a contractual relationship with an employer can be treated as an employee for the purposes of the BPT Act. A distinction is usually made with reference to the arrangement, and the relationship the employee has with the employer.
Ruling B65 sets out rules to help determine whether an individual should be considered as an employee (i.e. being in employment under a contract of service). The Ruling lists down seven attributes that must be present in the employer-employee relationship for it to be recognized as employment under a contract of service. Where the individual or person is not considered to have all these seven attributes in their relationship with their employer, the person would be considered as doing business and required to account for BPT on their income. These attributes include, inter alia, the employer having the right to control and direct the employee’s work, the employee being entitled to all the employment benefits as per the Maldives Employment Act.
Implications for lawyers
Consultants and advisors
Senior lawyers who act as consultants and advisors to law firms usually work at their comfort and do not strictly follow an employer-employee relationship. They are rarely directed by their employer and are seldom afforded the entitlements mandated by the Maldives Employment Act. Hence, they would not fulfil the requirement set out in the Ruling.
The implication of this Ruling would perhaps be most noticeable on the directors of companies and partners of partnerships, who, in most circumstances do not have an employment agreement with the entity, or do not have in their relationship with the entity, all the attributes stated in the Ruling. It is thus likely that the MIRA would consider those Partners as carrying out a business in their personal capacity if the partners draw a salary or receive a commission for the work they perform for the firm, in cases where the partners cannot establish that they fulfil all attributes stated in the Ruling.
The Ruling does not affect the associates as they usually work under a contract of service (an employment agreement) and the criteria in the Ruling are met under such arrangements.
The lawyers working in individual capacity would usually not fulfil all the attributes required by the Ruling and thus would require registering for tax and paying business profit tax from their income.
An employment agreement does not suffice
Generally speaking, the primary test of determining whether a person is an employee is the existence of an employment contract.
However, with this Ruling, an employment contract would not suffice – instead, the relationship or the arrangement must have all the attributes stated in paragraph 5 of the Ruling. Lawyers working under an employment agreement, and earning income by freelancing, is likely to fall within the BPT regime.
To be read with Tax Rulings A11
Although a lawyer cannot be considered to being in employment under a contract of service, it does not necessarily mean the income of that lawyer would be subject to BPT. The lawyer’s income can still be out of the BPT scope should it fall within the rules set out in Tax Ruling TR-2017/A11 (Registration of individuals and “deemed partnerships” under the Tax Administration Act), the main criterion being the average monthly gross revenue earned by the individual during any 12-month period does not exceed MVR 40,000.
The Ruling disregards some very fundamental concepts and established current practices between employers and employees. Worth noting are:
- The rules established by the High Court of the Maldives in the case of Help Driving School v Hassan Rizmeen (case number 2012/HC-A/271) that the primary determinant of establishing the employment relationship should be the existence of an employment agreement, which also includes the employee’s job description.
- The fact that an employee may work part-time with multiple employers and that it is possible for an employee to enter into an independent contract for service with his/her employer. This was acknowledged by the Supreme Court of the Maldives in the case of Reethi Rah Resorts Pvt Ltd v Mohamed Ibrahim (case number 2008/SC-A/13). Will an employee’s employment income from one of the sources be excluded when determining his income for BPT purposes under this Ruling? – this is a question that requires serious attention when complying with the Ruling.