Introduction

The Value Added Tax (VAT) is a system

adopted by more than 70 countries around the world.
It was in 1988 when the VAT system was introduced
and implemented in the Philippines under Executive
Order No. 273.
Various amendments were made to enhance
the VAT laws. Among the major changes were
introduced by the Expanded VAT Law (R A No. 7716)
in 1996. Professionals were included in the expansion
but, however, implementation was deferred until
December 31, 2002.
1. As a tax, what is the nature of the VAT in so far
as professionals are concerned?
It is a tax on payments for services rendered in
the exercise of profession or calling. It is an indirect tax
and, thus, it may be passed on to the client or
customer. It is a tax on sale of service and, as such, it
accrues at the time the service fee is collected whether
in advance or after the service is rendered.
2. What Revenue Regulations implement VAT on
services performed by those engaged in the
exercise of profession or calling deferred by R.A.
9010 until Dec. 31, 2002.
Revenue Regulations No. 1-2003, which took
effect January 1, 2003, and Revenue Regulation 7-95
(The Consolidated VAT Regulations), as amended
3. Who are covered by RR 1-2003?
RR 1-2003 covers the following:
Persons engaged in the practice of profession
including individual insurance brokers (required
to pass government examination)
General professional partnerships
Actors, actresses, talents, singers and emcees;
radio
and
TV
broadcasters
and
choreographers, musical, radio, movie, TV and
stage directors
Professional athletes and
Brokers
(Customs, Real Estate, stock,
immigration and commercial)
4.
Are the persons mentioned in Item 3
automatically subject to the VAT on their earnings

starting January 1, 2003?

Not all. Only those whose aggregate gross receipts
exceed, or are expected to exceed P550,000, in any 12month period are liable to the VAT; those with aggregate
gross receipts not exceeding P550,000 are subject to the
3% percentage tax (although they may opt for VAT
coverage) while those with aggregate receipts of not more
than P100,000 are exempt from both the VAT and
percentage tax, but nonetheless they are still required to
register with the BIR
5. How is VAT payable computed?
VAT payable is arrived at by deducting Input Tax
Credits from Output Tax. Output tax is the VAT due on the
sale of service or in a way of saying it, it is 10% of gross
receipts (or 1/11 of total amounts received or gross
receipts plus VAT). On the other hand, Input tax is the 10%
VAT passed-on to the professionals, entertainers, athletes,
etc. by his VAT-registered suppliers of goods and services
reasonably connected with the exercise of his profession or
calling.
Input tax also includes transitional and
presumptive input taxes.
If Input tax exceeds
Output tax for a particular period, the excess is an Input tax
in the next period.
6. How is VAT on professionals and other persons
subject to VAT collected by, or paid, to the
government?
Generally it is done thru the pay-as-you-file
system, that is, the taxpayer fills up the applicable VAT
form, file the same and pay the amount shown therein. But
if the client/customer is the government, the latter is
required to withhold the VAT at the rate of six percent (6%)
of
the
amount
payable
to
the
resident
professionals/entertainers/athletes. This VAT withheld can
be credited by the recipient against his VAT payable.
7.
When shall affected (newly covered) taxpayers
register as VAT taxpayers? What are the
consequences, if any, for failure to register?
Affected taxpayers are required to register not later
than February 28, 2003 in order to avoid the penalty for
late registration. A taxpayer with gross receipts of more
than P550,000 who fails to register as a VAT-person shall
nevertheless be liable to the VAT but he is not entitled to
any Input tax credit. Thus, in effect, he shall be paying the
entire 10% plus penalties.

8.
A professional registered as NON-VAT
taxpayer because his gross receipts in 2002
did not exceed P550,000 but, however, as of
June 30, 2003 he has already surpassed that
threshold. When should he register as a VATperson and when shall he be subject to VAT?
Within the month of July 2003, he must
register as a VAT-taxpayer and the VAT will
accrue on his earnings beginning August 1, 2003.
If he fails to register as a VAT-person, still he shall
be subject to the Output tax beginning August 1
but without the benefit of any input tax.
9.
Aside from registration, what other
important obligations/concerns must the
foregoing persons comply/take care of?
a. Issue to clients/customers duly-registered
VAT Official Receipts, if VAT-registered; or
NON-VAT ORs, if Non-VATregistered;
b. File monthly VAT declarations for the first
two months of the quarter and the quarterly
VAT return after the end of the third month
and pay the VAT due thereon. If registered
as a NON-VAT taxpayer and earning more
than P100,000 in a year, file a monthly
percentage tax return and pay the 3% tax.
c. Submit along with the VAT returns,
summary lists of sales and purchases in
proper cases using diskettes
10. May the unused NON-VAT official receipts
as of December 31, 2002 be used for
transactions subject to VAT?
Yes, provided that the phrase VAT
registered as of _____ is stamped on all copies
and that the taxpayer submits an inventory thereof
not later than January 31, 2003. These receipts
with the proper stamp shall be allowed for use in
transactions subject to VAT until June 30, 2003.
11. Are receivables arising from billed but
uncollected sale of services as of December
31, 2002 subject to VAT if collected in 2003?
Amounts due on sale of services rendered
on or before December 31, 2002 and collected
starting January 1, 2003 shall be considered
accrued as of December 31, 2002 and are exempt

from the VAT or percentage tax, provided the following

conditions are satisfied:

An information return shall be filed with the BIR

showing the name/s of the contractee/s,
client/s and the amount/s of the contract price
outstanding as of December 31, 2002 and
containing a declaration to pay the applicable
percentage tax due, if any.
The seller billed the unpaid amount not later than
December 31, 2002 and a copy of such billing is
attached to the required information return.
The seller has recorded the amount receivable in
its books of accounts for the year 2002.
The seller should issue a
non-VAT invoice
and/or receipt to the client/customer for this
purpose and
The seller files not later than January 20, 2003 or
th
on before the 20 day of the next month
depending upon the month of collection of the
consideration the regular percentage tax return
for the payment of the percentage tax on
payments received after 2002 (applicable to
brokers only.)

Note: Failure to comply with the above

stated conditions shall automatically
subject the gross receipts to VAT.
12. What is meant by transitional input tax
credits?
For goods (other than capital goods), materials
or supplies not for sale but purchased for use in
business in their present condition which are not
intended for further processing and are on hand on
December 31, 2002, a presumptive input tax
equivalent to 8% of the value thereof or the actual VAT
paid on such goods, materials and or supplies
whichever is higher, shall be allowed. This may be
credited against Output tax.
13. How could one be entitled to the transitional
input tax credit?
An inventory as of December 31, 2002 of such
goods, materials and supplies showing the quantity,
description and value should be filed with the RDO not

later than January 31, 2003.

14. How do we recognize in the books the presumptive
input tax as of December 31, 2002?
In recognizing the presumptive input tax as of
December 31, 2002, a journal entry should be made in the
book of accounts debiting the input tax account and
crediting the aforementioned asset accounts.

BUREAU OF INTERNAL REVENUE

15.
Will the transitory input tax credits apply to
brokers?
No, this will not apply to brokers. In case of
brokers any input tax outstanding in their books as
corroborated by their VAT returns as of December 31,
1999 and still unused as of December 31, 2002 shall be
allowed as transitional input tax.

FAQs

16. Will the imposition of the VAT on the exercise of

profession or calling not create a situation of double
taxation considering that they are already subject to
the withholding tax at the rates of 10% and 20%?
No, there is double taxation when a particular tax
is imposed against a person more than once for the same
transaction/business activity for the same taxable period.
The 10% and 20% withholding taxes are advance income
tax, not value added tax.

VALUE
ADDED TAX

Prepared By:
Taxpayer Information and Education Division
Taxpayer Assistance Service
BUREAU OF INTERNAL REVENUE
VAT Hotline: 9297602 to 04

on the

of
Professional
Services
Rendered
(Revenue Regulations
No. 1-2003)