‘Politically-correct’ taxation

The Bureau of Internal Revenue (BIR) has not missed a beat in subjecting high profile industries, individual and/or juridical entities, and major transactions to tax, and to tax rules and regulations.  With the 2013 national and local elections occurring less than a month after the deadline to file 2012 Income tax Returns (ITRs), the BIR has issued Revenue Memorandum Circular (RMC) No. 15-2013, to remind participants in the ongoing political fiesta of their special duties and responsibilities as taxpayers.  Let us take a quick look at these requirements.

RMC No. 15-2013 reminds individual candidates and political parties (including party list groups) to register with the BIR, or update their registration, if already previously registered since the 2010 national and local elections. It should be noted that the requirement of registration for election purposes extends even to individual and corporate contributors of either the candidates or the political parties, or both. Revenue Regulations (RR) Nos. 8-2009 and 10-2009, which further amended RR No. 2-98, requires even individuals and corporations to withhold five percent (5%) on their payments for goods and services, which goods and services are intended to be given as campaign contribution to political parties and candidates. Following this amendment, RMC No. 40-2010 expressly requires contributors to register with the BIR (with individuals having the special code reference of “POLIT” in the BIR Integrated Tax System or ITS).  If the contributors were previously registered during the 2010 national and local elections, then the registration would have to be updated.

Of course, the candidates themselves, together with the political parties, have to be registered as well. Those candidates and political parties previously registered with the BIR need to update their registration, likewise in accordance with RMC No. 40-2010. Political parties are registered under the tax type of non-stock, non-profit organizations in the BIR ITS.  Included under the registration requirements for candidates and political parties is the registration of adequate books and other accounting records such as cash receipts journal, cash disbursements book or their equivalent.

With registration done, we move to the transactions which are commonplace during elections.

First, evidence of payment for goods and services, and of donations, will require the issuance of official receipts (ORs). RMC No. 15-2013 requires the candidates, treasurers of political parties, and any person acting under the authority of the candidate or treasurer to registration ORs, to be issued for every contribution received, whether in cash or in kind. To address the issue of having the candidates et al try to print ORs so close to the election date, the BIR is reviving the discontinued practice of issuing “BIR-printed” non-VAT ORs. These are actually Non-VAT ORs in booklets, printed for the BIR, which used to be distributed to newly BIR-registered taxpayers that have not yet secured the necessary Authority to Print (ATP) ORs. The candidates are required to submit a summary of the ORs used within 10 days from the end of the elections.

Since every contribution, whether in cash or kind, shall be issued the appropriate OR, the next question would be, are these contributions subject to tax? Section 99(C) of the Tax Code states that any contribution in cash or in kind to any candidate, political party or coalition of parties for campaign purposes shall be governed by the Election Code, as amended.  While this is not stated in RMC No. 15-2013, we all know that under Section 13 of Republic Act (RA) No. 7166, as amended, any contribution in cash or in kind to any candidate or political party or coalition of parties for campaign purposes, duly reported to the Commission, shall not be subject to donor’s tax.  The BIR has, however, pointed out in RMC No. 63-2009 that the contributions which are not reported to the Commission on Elections (COMELEC) would be subject to donor’s tax.  And it is the contributor, not the candidate or political party that will be liable for the donor’s tax.  Contributors, take note.

Second, now that the candidates and the political parties have been funded, we go to payments that these participants make on purchases of goods and services.

As previously mentioned, RR No. 2-98, as amended, now requires payments for goods and services for campaign expenditures to be subject to a five-percent withholding tax.  This includes payments made by even the contributors to the service providers, if the goods and services are intended to be given as campaign contributions. However, if the contributor gives the contribution directly to the candidate or political party, then the contribution need not be subject to withholding tax.

The time to withhold, and the manner of remitting the five-percent withholding tax to the government, is stated in RR No. 2-98, as amended.

Of course, with the act of withholding, the candidates, political parties, and specific contributors have to issue the standard certificate of taxes withheld (BIR Form No. 2307), in triplicate, to the provider of goods and services.  Note the general rule provided under RMC No. 85-2012, reminding all withholding tax agents that the failure to issue BIR Form No. 2307 will result in the mandatory audit of the withholding agent, upon verified complaint filed by the provider of goods and services.  Everybody, take note.

Finally, when the elections are over, what do the candidates, political parties, and contributors do with all the paper (ORs, books of account, accounting records, summaries, BIR Forms, etc.) that they have generated?

The BIR registration of individuals, in their capacities as candidates, automatically ends after 30 days from the date of the elections. However, the BIR registration of the political parties continues to exist. Further, the BIR requires that political parties and all candidates preserve the records of contributions and expenditures, together with all pertinent documents, for at least three years after the holding of the election to which they pertain to.  In this case, the three-year period would be counted from 2013. These records may be subjected to an order for their production for inspection as authorized by the Commissioner of Internal Revenue (CIR).  Hence, even if the candidates are no longer registered with the BIR, they can still be subject to an audit investigation.

With regard the unused ORs, the same shall be returned to the BIR, with the summary/schedule of ORs used, within 10 days from the end of the elections.  Note that all the post-election requirements do not distinguish between the winning and losing candidates, and the political parties.

Does this requirement to keep accounting records and other documents likewise apply to the campaign contributors? Contributors are not expressly mentioned in RMC No. 15-2013 as covered by the requirement to either register books of account, and/or preserve the same. On the other hand, the BIR may argue that since a campaign contributor is subject to registration requirements under RMC No. 40-2010, they should likewise be required to maintain books of account pertaining to election transactions, and keep the pertinent documents for three years. Notwithstanding the additional requirements imposed on campaign contributors, and the risk of possible audit investigation, these requirements should be but a small price to pay for continuously supporting candidates and political parties that the contributors believe in.

Moving forward, the commissioner of Internal Revenue Kim S. Jacinto-Henares has recently stated in public that, at the end of the elections, excess funds or contributions in the hands of the candidates and political parties would be subject to income tax, unless returned to the contributors or donated to qualified charitable entities. This imposition of income tax would be aside from the possible violations of the above requirements, such as the failure to register, failure to issue ORs, failure to withhold, and failure to keep books of account, etc. Given the issuance of RMC No. 15-2013, and the commissioner’s recent remarks, it looks like the BIR is considering the conduct of post-election audit investigations.

Andrew James Gerard D. Ruiz is a senior manager from the tax group of Manabat Sanagustin & Co., the Philippine member firm of KPMG International. He has over 10 years in the audit profession.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or MS&Co. For comments or inquiries, please email [email protected] or [email protected].