WHY THE PROS WILL HATE THE VAT
By Emerson P. Redor, CPA
Published in Philippine Daily Inquirer, January, 2003
Sunstar Cebu, February, 2003
In the Philippine setting, professionals are not only those who passed the Bar and Civil Service examinations such as doctors, dentists, CPAs, engineers and architects but also include actors and actresses, athletes, movie and TV directors and other talents. Under the Philippine tax system, if they are employed by professional firms or production outfits, they are considered employees or wage earners earning compensation income. If however, they are engaged in the practice of their profession or craft or are on their own or as a partner in a general professional partnership and do not have any employer, they are considered self-employed. As self-employed individual taxpayers, professionals can deduct their practice-related expenses from their gross fees received or earned. Professionals are therefore taxed on their net income while employees or wage earners are taxed on their gross compensation income.
The VAT as an additional tax on professionals will affect both their sector and the people in many ways:
1. If the VAT will be passed on to their clients or patients, the tax becomes inflationary; doing this can be problematic also to them since their clients or patients have the option to scout for other professionals to service their needs, thus, they could end up losing some good paying clients or patients.
2. If the VAT will not be passed to their clients or patients, it will result in lesser net income to the professional.
3. Whether the VAT will be passed on or not to the end-users of their services, the professionals will have to shoulder the burden of doing additional paperwork in the form of monthly and quarterly VAT reporting and filing requirements to the BIR. They will also have to do efficient documentation and monitoring, on an almost daily basis, of their practice-related expenses with VAT inputs so that they may be able to deduct these VAT input taxes from the VAT output tax on their gross receipts and thus, minimize the VAT that they will remit to the BIR. They will also have to do this on time in order to avoid the BIR's huge surcharges and penalties in case of late filings. If the professionals themselves will do these BIR requirements, it will result in lesser productive or creative time for them. On the other hand, if the professionals will utilize the services of accountants or their financial assistants or alalays, they will be incurring additional costs in the form of retainer fees or salary increases due to additional workload, which will further erode their net income. The professionals also have the option to pass the burden of these additional expenses to the clients or patients, but again, this will be inflationary. The VAT proponents may argue that the VAT will also result in new income or employment opportunities but I personally believe that these are not the kind of jobs needed by our economy. What we really need are more factories and new production-related industries.
4. Under the VAT law, the professionals are lumped together with businessmen and are therefore considered profit-driven. But professionals are more service oriented rather than profit-motivated. In almost all the professionals' Code of Ethics, it is common to find the principle of service first before profit. They always want to master or perfect their craft or calling and would always aspire to deliver their best services or performances regardless of whether they will make money out of it or not. And that is how they earn their living. The VAT system will only make them materialistic rather than productive, creative or artistic.
WHAT THE GOVERNMENT SHOULD DO AT THIS TIME
1. Avoid inflationary financial/fiscal policies. The ordinary folks know what is good for them and the country. Some employers are resorting to pay cuts and other cost-cutting measures but their employees and workers understand and accept them because they know that the economy is bad.
2. Better tax collection, not new taxes. It is erroneous to equate better tax collection with new taxes. The government should also make a comprehensive assessment of the VAT system in relation to the government's tax collection efforts and its drive against graft and corruption in government. Also at present, fees of actors and actresses and other talents in the entertainment industry are subjected to 20% withholding income tax while the other professionals' fees are subjected to 10% withholding income tax. Some years back, the professionals' fees are subjected to 15% withholding income tax. I see no good reason why the other professionals' fees withholding income tax was reduced to 10% while the entertainment industry professionals' fees withholding income tax was increased to 20%.
3. Do not restrict the freedom and creativity of artists and other professionals through the VAT system. They should even be encouraged and subsidized by the government for their masterpieces and great work. They give our people the reason to excel in their respective fields and to have a sense of pride as Filipinos.