Dolphy, my lifelong idol, was on TV the other night. He complained that if he will have to pay the value-added tax (VAT) on his income, he may have to let go of his driver and, presumably, some other, ahem, amenities.  It was a brilliant performance, as always.

Let me show Dolphy how he can pay VAT and still keep his lifestyle. But, you may ask, who am I to be giving tax advice to the top movie star of the country? All insurance brokers and agents have been subject to the tax since 1994, if I recall right. So, we are all experts, at least as far as the VAT system applies to insurance.

Now, for some basics. The VAT is a sales tax. It is slapped on the seller, but the law allows him to pass on the tax to the buyer. In the end, the buyer pays the tax and the seller is BIR’s collecting agent.

When you insure your house, the invoice includes the premium and VAT (plus three other taxes which we will not take up so as not to clutter the discussion). You pay to your broker. Then the broker remits the premium and the VAT to the insurance company minus his commission and the VAT on the commission. If the premium is P1,000, the VAT is P100. Assuming a commission of 25 percent, the broker sends to the insurance company P750 plus P75. He keeps P250 plus P25. The broker sends the P25 to BIR less any VAT on his purchases. For example, if he bought stationery costing P100 plus P10 VAT, then he sends to BIR P25 less P10, or a net remittance of P15.

Back to Dolphy. Let us say he signs a P1 million contract. If his contract does not say anything about VAT, the law presumes that the VAT is included in the P1 million. As a result, he will be slapped a tax equal to one-eleventh (let us not go into where the one-eleventh comes from; just take my word) of the P1 million, or P90,909.09. Dolphy’s P1 million is down to P909,090.91. He will have to downgrade his lifestyle, poor fellow.

What Dolphy should do is to tell his producer that the contract will be for P1 million plus P100,000 VAT. With his clout, Dolphy should have no problem getting the producer to agree. Dolphy remits the P100,000 to BIR minus the VAT he pays on his purchases subject to the tax. For instance, Dolphy throws a  party, and the caterer charges him P100,000 plus P10,000 VAT. Dolphy deducts the P10,000 from the P100,000 he is to remit to BIR. Without the P100,000 VAT that Dolphy collected from the producer, he will have to pay the P10,000 from his pocket. Won’t Dolphy like this?

For his part, the producer pays the P100,000 out of the film rentals that he is already collecting from the movie house owners. Without the VAT on Dolphy’s contract, the  producer ends up sending P100,000 directly to BIR, instead of coursing it through Dolphy.

Dolphy’s P100,000 does not affect the movie house owners at all since they have been paying VAT on film rentals all along. This VAT on film rentals is part of the movie house owner’s operational cost and is built into the price of the ticket. As a result, Dolphy’s P100,000 should not raise ticket prices.

So, it is also incorrect for the Finance Department to say that slapping VAT on the movie stars will raise government income. Let the Finance people show me how this is so.

Finally, all the uproar by the movie stars was misplaced. Their income must be subject to the value-added tax, as an additional and specific amount paid by the producers, because that is the system.

If the commissions of insurance brokers and agents are subject to the tax, so should the income of the movie stars and, for that matter, the professionals. Fair is fair.



One would think that the deafening uproar against slapping the value-added tax on professionals would be spearheaded by loquacious lawyers from the bar association. Instead, the medical doctors marched with movie and TV stars and, with surgical masks off, swung away with their scalpels, so to speak.

But, it was clear from the furor that, like the entertainment people, the doctors know little about the workings of the VAT system. Or, maybe, they know it only too well.

If will help to clear things up if we stop mixing income tax with value added tax. The income tax is a tax on your net taxable income, defined as your gross income minus all deductions or expenses allowed by the tax code. Income tax is always payable from your own pocket.

Poor Dolphy, seen as the top earner in the entertainment industry, is being crucified for paying P2.5 million only in income tax. Why doesn’t BIR look into his deductions? If there are illegal deductions, throw the book at him. But, until then, let us take Dolphy down from his cross.

The value-added tax is a tax on the sale of goods or services. It is slapped on the seller but the law allows him to pass it on to the buyer. A doctor is considered the seller, his patient is the buyer. When a doctor issues his patient a receipt for P500, and the receipt says nothing about VAT, the law presumes that the tax is included in the P500. The net income to the doctor is P454.55 (let’s not go into how I arrived at this figure; just take my word, please). If the doctor wants to keep his P500 intact, he must charge the  patient an extra P50. The receipt must clearly be itemized, thus: P500 medical fee, P50 VAT.

The trouble is doctors, like all taxpayers, cheat on their income tax by issuing no receipts. And they want their fee in cold cash. I met a neurologist once who insisted that his P16,000 fee for reading a CT Scan be paid in cash, and no receipt, please. I told him where to go, asked the hospital to include his fee in the bill, and I covered the whole amount with my credit card.

With the imposition of VAT on professional fees, the doctor can very well tell his patient, “If you want a receipt, I will charge P550 in all; if you want to pay only P500, I will issue you no receipt, and I will accept no checks, please.” Such deals have been negotiated all over the country since President Aquino introduced the VAT in 1987.

But, some  patients, especially insurance brokers and agents, will insist on receipts. The patient does not mind  paying the extra P50 because he will deduct this from the VAT that he collects from his clients. For his part, the doctor can charge the VAT he pays on his purchases against the VAT he collects from his patients.

But once the doctor issues his receipt, he will have to declare the P500 as income subject to the income tax. From this view, the income tax and the value-added tax, although different, are actually related. Strict compliance with VAT rules will result in higher income tax revenue.

Then, the doctor will have to keep accounting records. But computerization should make things easier. Hiring a part-time accountant should not cost too much. And the doctor runs his clinic like a business. What’s wrong with that?

The VAT on doctor’s fees will have little or no impact on the  poor. The poor do not go to the doctors’ cubicles in Makati Med, St. Luke’s, or Chinese General. They go to the barangay clinics where service is free. If hospitalized, they find a bed in the charity ward.

My suggestion to the professionals is to stop their media campaign and buckle down to understanding the workings of the VAT system. Professional fees have been exempt from the tax since 1994.  It is time the exemption should stop.  If insurance brokers and agents have been able to live with VAT, so should the other professionals.



Recently, an insurance claimant asked the Insurance Commission for help. He was covered by two fire insurance companies. When his property burned down, the companies deducted from the claim the value-added tax (VAT) that the contractor charged him for repairing the damage.

Was this the correct treatment of the VAT in a property insurance claim? In other words, is the VAT insured, or part of the insurance?

This was the subject of a workshop-seminar staged by the Association of Philippine Adjustment Companies at the Philippine Columbian last Friday. I was flattered that one of the handouts was a clipping of my recent column, “VAT.”

The resource speaker was Atty. Victorino Carreon Mamalatao, CPA, Tax Consultant, Author, Professional Lecturer, and Bar Reviewer. He was a member of the Bureau of Internal Revenue Executive Committee that drafted the original Value-Added Tax Law (E.O. 273) and the implementing rules.

Mamalatao spent a full two hours explaining, in lucid detail, what the value-added tax is, how the system operates, and what the current applicable laws, regulations, and rulings on VAT are. He had everything at the tip of his fingers. I was quite impressed.

Most important for me was the question: is VAT insurable under property insurance?

During the open forum, I presented a theoretical, not an actual case. Let us say, I said, my house burns down. For simplicity, let us assume that the contractor I have hired to rebuild my house has quoted P1,000,000 plus VAT of P120,000. Is the VAT of P120,000 payable under my fire insurance policy or not?

The standard fire insurance policy guarantees that I must be returned to the same situation I was in just before the fire. If the VAT is not payable, then I will not be able to return to where I was before the fire.  In fact, I would be short of pocket by a cool P120,000.

Someone said that a fire insurance policy is a contract of indemnity. The insured can only claim what he lost. Is the VAT part of my house that burned down? Maybe it is not, but it is part of my expense to have the house rebuilt. It is not so much what burned down. What matters most is how much it will take to repair or rebuild.

Besides, there is the old-time principle of “proximate cause.” This principle proclaims that if there is an unbroken chain of events from the occurrence of a peril insured against (in my case, the fire) to the final repair expense (the VAT of P120,000), then that final expense is payable.

Manalatao agreed with me.  However, he added that I should hand over to the insurance company a valid VAT receipt so that the company can claim the amount as VAT input. In which case, the P120,000 is deducted from the output tax that the company remits to the BIR.

All in all, I was glad I came. The whole morning was pleasant, ending in an enjoyable lunch with red Cabernet. It was a wonderful chance to meet old friends and make new ones.


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