The onus of campaign spending by Wilfredo. U. Villanueva (November 2, 2009)

SUITS THE C-SUITE by Wilfredo U. Villanueva

Business World (11/02/2009)

(Will the elections be a boon or bane for the BIR?)
The Bureau of Internal Revenue (BIR) has spotted a potential gold mine in the forth-coming 2010 elections.
With the campaign season just around the corner, the BIR has jumped the gun on the substantial expenditures expected of political aspirants and their supporters, by requiring that tax be withheld on campaign-related payments.

Let us take a look at this recent directive which has spawned some questions from various camps, including the Commission on Elections (Comelec).

We are no strangers to the concept of withholding tax (WT). Virtually every payment that a company makes is subject to expanded withholding tax (EWT), especially if the company belongs to the Top 20,000 corporations. Revenue Regulations (RR) No. 8-2009 – which imposes a 5% WT on campaign-related expenses of political parties, election candidates and contributors to their campaign – is but a further amendment to the existing withholding tax regulations which is RR No. 2-98.

Now, before we get all hot and edgy about this new issuance, it is clear that it does not seek to subject campaign contributions, particularly cash donations by individuals, to any kind of WT. Neither does it deal with donor’s tax, obviously, because the Tax Code exempts from donor’s tax any contribution in cash or in kind to any candidate or political party for campaign purposes.

We might as well add that, where companies are concerned, the Corporation Code expressly prohibits corporations, domestic or foreign, from giving donations in aid of any political party or candidate or for purposes of partisan political activity.

Therefore, RR 8-2009 does not directly diminish a candidate’s much-needed funding by way of campaign contributions.

What RR 8-2009 specifically subjects to a 5% EWT are:
• income payments made by political parties and candidates of local and national elections for 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.

Consequently, all individuals, juridical persons and political parties, with respect to their income payments made as campaign expenditures and/or purchases of goods and services “intended” as campaign contributions, constitute withholding agents and, thus, are required to register with the BIR as such.

There is no mistaking that, being in the nature of a WT, the 5% EWT will be collected outright from the revenue of entities that will be supplying goods and/or services either directly to the candidates and their political parties, or to their supporters and contributors, as an advance payment of their income tax. This can refer to all sorts of election or campaign-related expenditures.

Under the Omnibus Election Code, the term “expenditure” includes the payment or delivery of money or anything of value, or a contract, promise or agreement to make an expenditure, for the purpose of influencing the results of the election. The term “contribution,” on the other hand, includes a gift, donation, subscription, loan, advance or deposit of money or anything of value, or a contract, promise or agreement to contribute, whether or not legally enforceable, made for the purpose of influencing the results of the elections.

Our election law also specifies what are considered lawful expenditures. These include traveling expenses of the candidates and campaign personnel in the course of the campaign; printing and distribution of printed matters relative to candidacy, including sample ballots; lease of campaign headquarters, office or place of meetings; as well as newspaper, radio, television and other public advertisements.

It bears pointing out that most of these expenses or income payments have already been covered by the WT system long before RR 8-2009.

Examples are payments made to transportation contractors, or to printers and publishers, except those principally engaged in the publication or printing of any newspaper or magazine which appears at regular intervals, with fixed prices for subscription and sale. So too are payments to advertising agencies, TV and radio station operators on their sale of TV and radio airtime, and TV and radio block timers on sale of TV and radio commercial spots.

These expenses are already subject to 2% EWT, which rate now appears to have been modified by RR 8-2009 when made in the context of campaign spending.

The same issue arises, for example, in the case of professional entertainers whose services are widely in demand during the campaign season, because under existing rules, their talent fees are already subject to a higher 20% WT rate.

Whenever a new tax compliance requirement is introduced by the BIR, many view it as unnecessary burden. The new directive imposes an additional burden on electoral candidates, their political parties and even their supporters. They will now have to troop to the BIR to register as withholding agents, and then, eventually, they will need to go through the nitty-gritty of preparing WT returns, and remitting the taxes withheld on all their campaign-related payments, which might be the least of their concerns once the campaign is under way.

The situation may also pose some problems for the suppliers (whether of goods or services), if and when discrepancies arise in the WT remittance report of the purchasers and the statement of political expenditures and contributions that the election law requires the candidates to submit to the Comelec.
These issues aside, and from the standpoint of pure pragmatism, the BIR cannot be faulted for requiring the withholding of tax on campaign expenditures because of its huge collection deficit. Some observers say that this is an acknowledgment by the revenue agency’s previous failure to properly collect taxes on substantial election spending in past elections.

At this point, one can look at this whichever way he or she wishes to. But if the BIR can ensure that this WT system will work, that everyone complies regardless of political preference, and that it can get the Comelec to agree on its mechanics, then it will have demonstrated clear political will in what is expected to be a fiercely, but hopefully fairly, contested political exercise.
(Wilfredo U. Villanueva is a Tax principal of SGV & Co.)

This article was originally published in the BusinessWorld newspaper. It 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.