Practice of law not a ‘trade or business’ – Why the VAT?

Awaiting the signature of the President is a proposed amendment to the law on value added tax that would exempt banks and non-bank financial intermediaries, as well as doctors and lawyers from the payment of the VAT.

The Department of Finance, however, is opposing the exemption of lawyers and has recommended the veto (a line or partial veto, in legislative parlance) of that part of the bill exempting lawyers.

The proposed exemption of lawyers is not without any valid basis.

From the beginning, the attempt to subject to VAT legal fees received by lawyers for "rendering" (as opposed to "selling") legal services has been misplaced. It is a case of shotgun taxation. Our fiscal policy-makers failed to appreciate the peculiar nature of law practice (as distinguished from the exercise of other professions) – that it is far from being a "trade" or "business". That fees are paid as compensation for legal services does not necessarily make the practice of law a business which would justify the imposition of what is essentially a tax on business, such as the VAT.

The legal fees received by lawyers are, of course, in the nature of income and is in fact subject to income tax. But income in the nature of legal fees is not similar to profits or gross receipt derived from trade or business conducted for profit. Hence, the treatment of the practice of law as a business that should be subjected to the VAT not only disregards the peculiar nature of law practice, but is also a distortion of the very concept of the value added tax as a business tax.

The practice of law, according to a Supreme Court decision, is imbued with public service and it does not become "less of a public service (simply) because it may incidentally be a means of livelihood." In that case the Supreme Court described the essence and peculiarity of law practice which set it apart from the practice of other professions:

"The practice of law is intimately and peculiarly related to the administration of justice and should not be considered like an ordinary money-making trade."

Indeed, lawyers are deemed officers of the courts and perform a key role in the overall system of dispensing justice.

According to the same decision, "a partnership for the practice of law cannot be likened to partnerships formed by other professionals or for business. It is not a partnership formed for the purpose of carrying on trade or business or of holding property; that the right to practice law also involves the exercise of a special privilege, highly personal and partaking of the nature of a public trust."

In the context of the VAT as a tax on the "sale of goods or services", it is clear that the basis of the tax is a business transaction involving a "sale". And the right to sell necessarily includes the inherent right to actively solicit business and to advertise the services that one offers to the public. But in the case of lawyers, the Canons of Professional Ethics prohibit them from advertising their services or soliciting cases. Hence, the concept of "sale" in the context of the practice of law is an absurdity. To lump lawyers and their rendering of legal service with the ordinary seller of goods and the act of engaging in business for profit betrays a lack of understanding of the essence of law practice.

Lawyers are subject to strict and ethical standards which restrict the manner in which the practice of law is conducted, placing it beyond the realm of a trade or business. Given the real essence of law practice as explained by the Supreme Court, the practice of law cannot be considered a trade or business and, therefore, cannot be the proper subject of the VAT.

The apparent bias against lawyers may have stemmed from the perception about the large law firms in Metro Manila, forgetting that law is practiced all over the country, including the remote areas. And there are more solo practitioners and smaller law firms than big ones.

There is the argument that the VAT can be passed on or shifted anyway to the clients. But this only serves to highlight its ultimate adverse impact on the ability of the majority, particularly the poor litigants, to have access to legal service, if the VAT were to be shifted to them.

If doctors merit an exemption, the DOF’s bias against lawyers appears to be misplaced.

It goes without saying that taxation must be rational and just. Native good sense tells us that there is a fundamental distinction between the practice of law as a means of livelihood and a trade or business conducted for profit.

The author may be reached at tel. nos. 830-8000/894-0109; e-mail address; [email protected]