Withholding mechanism for VAT on professionals mulled

The Department of Finance (DOF) is considering the possibility of instituting a withholding mechanism for professionals to ease the payment of the value added tax (VAT) that became effective this year.

The DOF, however, ruled out the possibility of extending the VAT registration period for professionals, warning that they would be facing penalties if they fail to register today, the deadline for VAT registration.

Finance Secretary Jose Isidro Camacho told reporters that the Bureau of Internal Revenue (BIR) is developing a scheme that will make it easier for professionals to make their VAT payments once they have registered with the BIR.

However, Camacho said the BIR has no intentions of extending the registration period for professionals who must be registered to be able to make their VAT payments on March 20.

"They’re not asking for an extension anyway. I have seen no application to that effect, so the Feb. 28 deadline stays," he said. "If they fail to meet the registration deadline then they cant pay on March 20 and they will be penalized."

On the other hand, Camacho said that for VAT-registered professionals, the BIR is preparing an arragement that will allow hospitals, broadcast networks and other institutions to withhold the VAT from the fees paid to artists, doctors, engineers and other professionals.

According to Camacho, the proposal turned out to be more complicated than expected since professionals are also allowed to deduct input VAT from their output VAT, making it difficult to automate the process.

Under the law, salaried employees pay a percentage income tax based on their income bracket and the levy is deducted automatically from their salaries. Since this is a straightforward tax with fixed deductions depending on civil status and number of dependents, it is easy to allow employers to act as withholding agents.

"It’s not so easy for professionals because it means that the networks or hospitals or whatever institutions would also have to evaluate the specific input VAT deductions that the taxpayers may want to claim," Camacho said.

"Intuitively, it’s a good idea but it’s a little more complicated to actually implement," he pointed out. "That’s why it is taking the BIR longer than we thought it would to develop this scheme."

Camacho pointed out that companies employing professionals could only act as withholding agents and they are not authorized to make an evaluation of the input VAT claims.

Camacho said the VAT law is liberal enough to allow professional entertainers to deduct various costs from their taxable income, such as surgical enhancements, costumes and other costs related to the practice of their trade.

Camacho told reporters that the entertainment industry need only to understand the provisions of the law to realize that the imposition of the VAT on professionals is "reasonable".

The DOF has been under heavy fire from the entertainment industry which has been most vocal against the expanded VAT that took effect in January this year after being deferred since 1997.

Entertainers have been harping about the "new" tax, claiming to be unaware of the VAT which has been in effect since 1997.

"We have actually been discussing these issues for years now and we’re just doing it all over again," Camacho said. "The simple fact of the matter is that our fiscal problem is bigger than all of us and it’s only fair for all of us to pitch in."

The DOF explained that professionals would not have to pay the VAT since their employers could shoulder this tax and in turn claim it as an input VAT deductable from their output VAT.

"In the case of entertainers, for example, an actor getting P1 million from a studio would instead get P1.1 million and he will then remit the extra P100,000 as VAT payment," Camacho explained. The production outfit would only pass on this additional amount and credit it as input VAT that could be subtracted from its output VAT. The resulting amount would be the final VAT payment.

Camacho said entertainers could even pocket part of the VAT advanced to them since they could deduct various items from it, in the form of costs spent in the practice of their trade.

"This could be anything from surgical enhancements to costumes, representation costs and even salaries that they pay to their assistants and groupies," he said. "So all they have to do is collect all the receipts for everything they spend and deduct what could be deducted from their VAT."

This means that actors and actresses actually have a wide leeway. They can deduct the cost of their nose jobs, diet pills, clothes and even dinners from their VAT payments, provided they have the receipts.

As a result, Camacho said the domino effect of the audit trail that the VAT will create is ultimately as valuable as the actual taxes that will be collected directly from professionals.

"The beauty of the VAT is that it is very transparent, it forces everyone to be transparent," Camacho said. "If everyone demands the receipts for everything they pay for then the people who sell goods and services would be forced to issue receipts."

This simple consequence of the VAT, he said, would expand the government’s tax base since it would allow the Bureau of Internal Revenue to capture all taxable transactions, goods and services.

Camacho pointed out that compensation income earners are paying a disproportionately large amount of taxes while professionals who earn more than double are paying significantly less.