Stricter rules for self-employed professionals

Taxwise Or Otherwise
Rachel I. Diciano

Posted on April 10, 2014

PROFESSIONALS like lawyers, accountants, doctors, engineers, etc. are known for their significant contributions to society by way of serving the public interest. Recent developments, however, may have created a different perception, specifically in terms of tax compliance.

In his 2011 State of the Nation Address, the President himself regarded professionals as one of the least tax-paying sectors in society. This may have driven the Bureau of Internal Revenue (BIR) to place additional tax compliance measures on professionals (especially the self-employed) to determine their correct income and corresponding taxes due to the government.

To date, self-employed professionals, whether or not they are licensed by a government regulatory body, are required to comply with the following general tax obligations, among others:

Registration with the BIR. Self-employed professionals are required to register with the appropriate BIR office having jurisdiction over them. This entails payment of an annual registration fee of P500 upon registration, and every year thereafter on or before Jan. 31.

Registration as VAT taxpayer. In 2012, Revenue Memorandum Circular (RMC) No. 64-2012 clarified that professionals, aside from the applicable income tax, are also subject to business tax. If there are reasonable grounds to believe that the gross receipts from the business/profession for the next 12 months will exceed P1,919,500, the self-employed professional must register as a VAT taxpayer. If the threshold will not be breached, he shall be subject to percentage tax of 3% on the gross receipts.

In determining whether the VAT threshold will be exceeded, revenue from other lines of business which are likewise subject to VAT must also be considered together with income from the exercise of profession.

Registration of books of accounts. Books of account, whether manual or computerized, are required to be presented to the BIR annually for approval and registration. BIR permits are required prior to using any computerized accounting system. Further, if the gross quarterly earnings or receipts exceed P150,000, the books must be audited and examined yearly by an independent Certified Public Accountant.

Registration and issuance of official receipts. Upon receipt of payment for professional services rendered, BIR-registered official receipts should be issued to the clients indicating the required information (i.e., total amount paid; amount of VAT, if applicable; date of transaction; nature of the service, authority to print, if applicable, etc.).

Withholding tax obligations. Income payments to employees and suppliers such as rentals, utilities, contractor fees, etc. should be subjected to applicable withholding tax at various rates ranging from 1% to 32% under existing regulations. Failure to comply with the withholding tax requirements may result in deficiency withholding taxes and income taxes in the event of a BIR examination.

Monthly withholding tax returns (BIR Form No. 1601) must be filed generally within 10 days following the close of the month. Annual Information Returns (BIR Form No. 1604) summarizing the monthly payments are due to be filed in January and March.

Income tax return filing and payment. An individual receiving self-employment income is required to declare income (together with income from other lines of business) and pay the corresponding tax on a quarterly basis.

The first three declarations must be filed using BIR Form No. 1701Q on April 15, Aug. 15 and Nov. 15 of the current year, with the final adjusted annual declaration (BIR Form No. 1701) due on or before April 15 of the following year. If the gross quarterly earnings or receipts exceed P150,000, the annual income tax return must be accompanied by audited financial statements.

Filing of VAT/percentage tax returns. For VAT-registered professionals, monthly VAT declarations (BIR Form No. 2550M) must generally be filed within 20 days following the close of the month, with quarterly VAT returns (BIR Form No. 2550Q) generally within 25 days following the close of each quarter.

For non-VAT taxpayers, the monthly percentage tax returns (BIR Form No. 2551M) should be filed with the BIR not later than the 20th day following the end of each month.

To complement the BIR’s efforts in running after non-compliant professionals, the BIR issued Revenue Regulations No. 4-2014 which took effect on April 5, imposing additional requirements to monitor the service fees charged by self-employed professionals, consisting of the following:

• Submission of an affidavit indicating the rates, manner of billings and factors considered in determining the service fees. Similar to the annual BIR registration fee, this must be filed upon registration and thereafter, annually on or before Jan. 31 of each year.

• Registration of official appointment books containing the names of clients and the date and time of meetings.

• In pro-bono cases where no professional fees are charged, a BIR-registered official receipt must be issued and duly acknowledged by the client, showing a 100% discount.

All existing and registered self-employed professionals must submit the required affidavit and register their appointment books within 30 days from the effectivity of the RR, i.e., on or before May 5.

While I agree with the intention behind RR 4-2014, further clarifications may be necessary to address some issues for effective implementation, specifically in terms of the coverage.

RR 4-2014 falls short of delimiting the term “self-employed professionals”. If we are to consider other references, RMC 64-2012 defines the term as “an individual or a group, practicing his or their profession or calling, with or without license under a regulatory board or body”. This broad definition deviates from traditional perceptions of professionals as those subject to government licensure examinations and regulatory bodies such as the Professional Regulations Commission (PRC).

The crux of the matter is that the regulations fail to define what the exercise of a “profession or calling” means. As such, the term could encompass all persons who derive income from the practice of a career or vocation, outside an employment relationship, with or without a license. It leaves doubts of whether all occupations requiring specialized education or training, such as financial/investment managers, researchers, journalists, IT technicians and all other degree-holding or technical jobs are covered.

On a related matter, since the purpose of the RR is to increase tax compliance by ensuring that self-employed professionals are declaring their correct income, perhaps the BIR could consider relaxing the requirement for those whose income tax declarations are already supported by audited financial statements.

In this regard, the BIR could consider waiving the requirement on the affidavit and the appointment books. Since the financials have already been examined by an independent CPA against generally accepted accounting standards, the government could somehow put some level of reliance on the reported income.

Thus, the purpose behind RR 4-2014 may have already been met and effectively enforced without the additional measures.

The author is an assistant manager at the tax services department of Isla Lipana & Co., the Philippine member firm of the PwC network. Readers may call (02) 845-2728 or e-mail the author at for questions or feedback.

The views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.