Candidates, campaign, and compliance

By Dakila Elteen M. Napao

First Published in Business World (4/1/2013)

An election campaign period almost always results in a significant increase in media advertisements, as political candidates crowd the airwaves with ads and jingles for that very important name recognition and recall come Election Day.

This significant increase in advertising spending during this election period could also mean a substantial increase in tax revenues. The challenge for tax authorities, then, would be the optimization of tax revenues from media ad placements, given the diverse practices of industry players.

A study by Bureau of Internal Revenue (BIR) has shown that advertisers usually pay directly to the advertising agency or the media supplier for the total cost of the advertisement, inclusive of creative and media services, advertising commissions or service fees and value-added tax (VAT). However, the differences in billing and recording procedures among the various ad practitioners and media suppliers may result in inaccuracies in income reporting by recipients. This, in turn, may affect the computation of taxes due on the transaction.

For the BIR, therefore, simplifying the invoicing and recording procedures in this area is key to tax compliance. Late last year, the BIR issued Revenue Memorandum Circular (RMC) No. 63-2012 (perhaps in anticipation of the influx of campaign ads from January to May 2013) to standardize the procedures for invoicing and recording income payments and gross receipts for media advertising placements, and to clarify their tax treatment, viz.

For income payments by advertisers to the media supplier: The media supplier should bill the advertiser for the total amount of the media placement. Upon payment, the advertiser should withhold 2% expanded withholding tax (EWT) on the entire amount paid to the media supplier, and should issue a Certificate of Creditable Income Tax Withheld at Source (BIR Form 2307) in the name of the media supplier. Upon receipt of the payment, the media supplier should issue a VAT official receipt to the advertiser, and should report the entire amount as income for income tax purposes.

On the part of the advertising agency: The ad agency should bill the media supplier for its commission or service fee. Upon payment, the media supplier should withhold 2% from the commission or service fee of the ad agency, and should likewise issue BIR Form 2307 in the name of the ad agency. The agency should then issue its VAT official receipt to the media supplier for the amount received.

On December 28, 2012, the BIR subsequently issued RMC No. 91-2012 to cover invoicing and recording of income payments for media advertising placements under a “split payment” scheme, where the advertiser engages or contracts directly with a media supplier and an ad agency. In such a case, income payments directly made by the advertiser to the media supplier and to the ad agency are limited to the cost of the services provided by each entity.

The 2% EWT cited in RMC 63-2012 and 91-2012 for payments to the media supplier and to the ad agencies follows the provisions of Revenue Regulations 2-98, as amended, which imposes the 2% EWT on income payments to (i) advertising agencies, exclusive of gross payments to media, (ii) TV and radio station operators on sale of TV and radio airtime, and (iii) TV and radio blocktimers on sale of TV and radio airtime.

However, political candidates, political parties and political campaign contributors should not lose sight of Rev Regs 8-2009, dated October 22, 2009, which imposed a 5% EWT on “income payments made by political parties and candidates of local and national elections of all their campaign expenditures, and income payments made by individuals or juridical persons for their purchases of goods and services intended to be given as campaign contribution to political parties and candidates.”

Thus, clients/advertisers must now contend with the 2% and 5% EWT rates.

RMC 63-2009 dated November 12, 2009 clarifies that the 5% EWT rate under Rev Regs 8-2009 will apply in the withholding of tax on campaign expenditures. Thus, it appears that clients/advertisers should use the 2% EWT rate on regular, non-election or non-campaign related media advertisements, on the one hand, and the 5% EWT rate on election or campaign related advertisements, on the other hand. Commission on Elections Resolution 9615 defines a “political advertisement” or “election propaganda” as “any matter broadcasted, published, printed, displayed or exhibited, in any medium, which contain the name, image, logo, brand, insignia, color motif, initials, and other symbol or graphic representation that is capable of being associated with a candidate or party, and is intended to draw the attention of the public or a segment thereof to promote or oppose, directly or indirectly, the election of the said candidate or candidates to a public office.” In broadcast media, political ads may take the form of appearances on TV shows and radio programs, live or taped announcements, teasers, and other forms of messaging or announcements used by commercial advertisers.

The 5% tax withheld on election or campaign-related political advertisements should be remitted by filing the Monthly Remittance Return of Creditable Income Taxes Withheld (BIR Form 1601-E) in triplicate copies with the Revenue District Office (RDO) where the candidate, political party or contributor is required to register and file the return. The failure to withhold EWT can result in deficiency EWT assessment plus increments on the part of candidates, political parties or their contributors and supporters.

In addition, RMC 15-2013, dated February 12, 2013, was recently issued to remind candidates and political parties, including party list groups, of their duties as withholding agents under Rev Regs 8-09, expressly mandating that they obtain Tax Identification Numbers (TIN) and register as withholding agents in the RDO having jurisdiction over their Head Office or principal office. RMC 15-2013 further echoed Rule 7 of COMELEC Resolution No. 9476 requiring the preservation of their records of contributions and expenditures, together with all pertinent documents, for at least three (3) years after the election for audit purposes by the BIR. This audit will most certainly focus on compliance by the political candidates and parties of their withholding tax obligation imposed by Rev Regs 8-09.

Given the Government’s drive to improve tax compliance, political candidates should consider promoting and publicizing their own tax compliance as part of a winning campaign strategy. After all, candidates and political parties running for public office are duty bound to help Government generate much needed revenues for public service spending.

Dakila Elteen M. Napao is a Senior Tax Director of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.