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Problems in the imposition of VAT on professionals

(Article published in the Jan 13,2003 issue of TODAY, Business Section)

When Finance Secretary Jose Isidro Camacho, in contrast to the weak-kneed backing he gave to Lani Nañagas and René Bañez when they were undeservedly pilloried by the labor groups at the Social Security System and Bureau of Internal Revenue, came decisively forward to oppose any further extension of the exemption of professionals from the value-added tax (VAT), the BIR greeted the new year by issuing Revenue Regulations 1-2003 in the light of the expiration on December 31, 2002 of the extension last granted by Republic Act 9010.

Essentially, the new regulations simply extend to professionals the same treatment that the provisions of seven-year old Revenue Regulations 7-95 give to other service providers. In the details lurked the devil, however, and it is the cumulative effect of the aggravation and frustration over the details of implementation and compliance that is likely to tempt professionals into considering this coming Chinese year of the Goat as the secretary’s year.

The first issue is determining who are these new entrants into the VAT net. Section 1 of RA 9010 deferred to January 1 the application of the VAT on "services performed in the exercise of profession or calling subject to the professional tax as provided under Republic Act 7160, otherwise known as the Local Government Code of 1991, and professional services performed by registered professional partnerships; actors; actresses, talents, singers and emcees; radio and television broadcasters, choreographers; musical, radio, movie, television and stage directors; and professional athletes" (mentioned in Sec. 5(a)) and "services rendered by stock, real estate, commercial, customs and immigration brokers".

In contrast, Section 1 of Revenue Regulations 1-2003, while making the same enumeration of covered persons, omitted the qualification, "subject to the professional tax as provided under RA 7160." Well and good, if such qualification did not matter, as when everyone who exercises a profession or calling is subject to the professional tax under the Local Government Code. But suppose, a province or a city, both of which are given by the law the authority to impose or not impose the professional tax, decides to exempt certain professionals, such as embalmers, from the tax in recognition to their contribution to the welfare of the local government unit, would they still be subject to Revenue Regulations 1-2003? The text of the implementing regulation suggests an affirmative answer; but then, such a view would mean that the regulation exceeds the plain meaning of the text of the law that it is implementing. That is a consummation not devoutly to be wished.

Another problem: assuming a covered service, such as lawyering. A colleague of mine spent his holidays, all the way up to December 31 last year, working out an agreement for a client. Naturally, since the work was finished only a few hours before the firecrackers started exploding, he was not able to prepare his bill for the services he had rendered. When he eventually sends his bill and gets paid this year, will the payment be subject of the value-added tax (VAT)?

The VAT, by its very nature, is an indirect tax on the consumer of the subject goods and services. Hence, while the direct liability to pay the tax is imposed on the seller of goods and services, the economic burden is expected to be passed on to the consumer. This means that the reckoning point on the question of when the VAT becomes a liability is the time when the goods are sold and when service is performed. Not the time when the consumer is given a statement of account. Section 3.c of Revenue Regulations 1-2003, however, takes a different reckoning point.

Section 3 provides that amounts due on sale of services rendered on or before December 31, 2002 will be considered accrued as of December 31, 2002 (and therefore not subject to the VAT) only if, among other conditions, it had been billed on or before December 31, 2002. In short, it is the time of billing, and not when service was rendered, that Revenue Regulations 1-003 will determine whether the payment for services rendered on or before December 31, 2002 will be subjected to the VAT. This is clearly erroneous and should be corrected.

A third problem deals with the unused receipts of taxpayers who used to be non-VAT registered and who, starting January 1 are now subject to VAT. These are required to submit an inventory of unused receipts as of December 31, 2002 and to stamp on them the phrase "VAT-registered as of _________". They may use these receipts only until June 30, 2003. This period may be sufficient for some, particularly those who do not have many unused booklets or those who have many VATable transactions. However, for many professionals who bill on a monthly or quarterly basis, this time is too short. By June 30, because industry practice requires a minimum number of booklets to be ordered, many would be saddled with unused booklets by the end of this year’s first semester.

There seems no reasonable justification for the June 30 deadline. All these booklets have already been registered with the BIR when they were initially taken and they will be presently inventoried and a listing will be submitted to the Bureau. So why the expense of ordering new booklets when one can, without any danger of being able to defeat the VAT with the use of the stamped unused receipts? At the very least, the cut-off date appears arbitrary and wasteful of the taxpayers’ money.

The new regulations also appears to have overlooked a common practice in some professions, like law, that could cause the Bureau to lose a significant amount of collection. In the legal profession, for instance, it is common practice to bill a client in one statement of account for, generally, two items, namely, (a) professional fees and (b) re-imbursement for out-of-pocket expenses. The first, of course, are now subject to the VAT, but the second, may or may not be, depending on what those sums were expended for on behalf of the client.

When professional fees were not yet subject to the VAT, the bureau actually benefited every time the expenses were for VATable items. The clients never bothered to claim any input VAT on those items. Thus, the input VAT which could have been claimed against the client’s output VAT did not diminish the output VAT collected from the client.

Under current law, however, a client can be expected to claim as input VAT, the entire amount paid to his lawyers, both for professional fees and out-of-pocket expenses. If the out-of-pocket expenses were for VATable items, then the anomaly under the previous dispensation is simply corrected. However, if they were for non-VATable items, then the amount that will be ordinarily claimed as input VAT will be overstated with a resulting deduction against the client’s output VAT for a phantom input VAT.

This is due to that fact that Congress, in order to avoid reminding the consumer that he is really the person paying the VAT, removed the requirement that the amount of the VAT be itemized in the official receipt and simply settled for a statement that the price is already inclusive of the VAT (Sec. 113(A)(2) of the Tax Code). This meant that a VAT registered person, instead of being told how much VAT was passed on to him, calculates for himself the input VAT on his purchase of goods and services simply by multiplying the entire amount reflected in the receipt with the fraction 1/11.

When that method of calculation is applied to a receipt from a professional, the client would simply claim as input VAT the 1/11 of the entire billing, professional fees as well as out-of-pocket expenses. Sorting these items out to ferret out the actual amount of input VAT that can be claimed is much more of an administrative nightmare for the taxpayer and more so for the Bureau of Internal Revenue than the looming headache that is to come from the imposition of VAT on financial services, a measure the good secretary (certainly not because of his previous affiliation with the banking industry) is willing to be flexible about.

Finally, the new regulations provide for too short a transition period within which professionals could comply with the new regime. They are required to register as VAT taxpayers no later than January 31, 2003. Not later than that same date, they are supposed to give an inventory to the BIR of heir unused receipts indicating the number of booklets and their corresponding serial numbers. In order to be able to remove from the VAT payments that will be received for services rendered before December 31, 2002, they must also file on or before the end of the month an information return showing the names of clients or customers, amounts of the contract price billed as of the end of the year, and submit a copy of such billing, and, if they are brokers, the taxpayers must file not later than January 20, 2003 the regular percentage tax returns on the payments received this year. And to make sure that they are able to claim the proper presumptive input VAT on items purchased on or before December 31, 2002 for use in the business in 2003, they must file an inventory of such goods, materials and supplies showing the quantity, description and value and, aside from making an inventory, a journal entry should be made in the books debiting the input tax account and crediting the said asset accounts, but not if they are brokers. Now try explaining that to my favorite bold actresses for her purchases last year of bedroom attire and other paraphernalia to be used (or more accurately unused in the exercise of her calling in 2003) and see if she can make head or tails out of it.

Don’t get me wrong. I am not against asking the professionals to pay the correct business or professional tax on their services. But I am for a more rational basis and reasoned process of implementing such an exaction. We, taxpayers, and the bureau itself, have been lulled into complacency when the tax on professionals for various reasons, was repeatedly deferred by Congress with the blessings of the Executive. We now wake up for the first time to the reality that the VAT, like a train at the opposite end of the tunnel, is inexorably approaching us.

A bloody collision of flesh and steel is bound to occur unless the government does the right thing by deferring the collection of the VAT on professionals for the last time and mandating in the interim a "unity consultation" (if I may borrow current terminology) with the sectors affected on how to get the proper tax collected. That was done recently by former BIR commissioner René Bañez preparatory to the issuance of regulations imposing a ceiling on the deduction of representation expenses. The exercise resulted in the regulations coming out unopposed and, without doubt, substantially complied with. The same should be done with VAT on professionals.