'All systems go' for campaign tax

Late this November, Bureau of Internal Revenue (BIR) chief Joel Tan-Torres announced that the tax-gathering body was “all systems go” for the controversial five percent withholding tax scheme for next year’s elections. Working together with the Commission on Elections (Comelec), the BIR will monitor candidate spending, taking five percent of the cost paid by candidates or their contributors for campaign materials.

The new tax scheme has met with a lot of resistance, particularly from those running under the opposition. Some have questioned the scheme’s constitutionality; others ask why such a scheme should be followed at all, given that there has never been a need for it.

If enacted correctly however, the scheme could generate as much as P1.5 billion to cover the government’s growing deficit, in addition to providing the BIR with a direct means to monitor spending among candidates.

What is the campaign tax?

Revenue Regulation 8-2009, part of BIR’s “Project: Iboto Mo”, proposes a five percent withholding tax on the campaign expenses of candidates running next year.

As Tan-Torres explained, “The five percent campaign tax is not imposed on the contributors, donors or candidates but on the supplier who rendered services or products for campaign.”

“Under the new scheme, BIR will give tax credits to suppliers who already remitted taxes on campaign services. So by April next year, BIR will deduct these tax credits on campaign services from the supplier's annual income tax so in essence there is no additional tax collected,” he added.

To illustrate the idea, he gave the example of a candidate who pays a supplier P100 for campaign t-shirts. Normally, the supplier would make P100 from the transaction and simply pay the usual 32 percent income tax, or around P40, in April. Under the new scheme, the supplier would have to give the BIR five percent of their earnings as tax--P5 in the example, so that the total they make from the transaction will be P95. Come April, the supplier would only have to pay P35 in business tax, because the P5 in withholding tax for campaign services rendered had already been paid.

Atty. Pamela P. Palad writes in the Business Mirror that “(t)he payments subject to the uniform rate of 5-percent [creditable withholding tax] cover only the following: (a) payments made by political parties and candidates of local and national elections for their campaign expenditures; and (b) payments made by individuals or juridical persons for their purchases of goods and services intended to be given as campaign contributions to political parties and candidates.”

Following up on this, BIR issued memorandum order 35-2009 which states that local and national candidates will have to register as withholding agents.

“In partnership with Comelec, BIR will make it easier for candidates to register as withholding agents so we will hold registration centers in all Comelec offices that will receive CoCs,” said Tan-Torres.

As withholding agents, candidates and their parties will have to submit monthly reports to the BIR beginning December 2009 until August 2010. The collecting agency can then monitor the candidates’ spending and see whether they have been complying with withholding tax obligations.

Improved tax collection

The withholding tax scheme is part of the BIR’s attempt to improve tax collection, as it has previously been criticized for failing to meet revenue targets. Previous BIR chief Sixto S. Esquivias IV had resigned early in November, before completing a full year in office, supposedly due to the tax body’s failure to meet its quarterly collection targets.

While the agency was mandated to collect at least P798.5 billion this year, tantamount to around three-fourths of the government’s revenue, it only managed to collect P557 billion as of September. This is P20 billion short of its target for that time period. In order to meet the yearly goal, the BIR will have to collect at least P241.5 billion in the last quarter of the year.

The failure to meet targets has also exacerbated the government’s deficit, which rose to P237.5 billion this year, beating the record deficit of P210.7 billion in 2002. Many see it going past P250 billion by next year.

According to Tan-Torres, the BIR will generate at least P1.5 billion from the campaign tax scheme, a relatively small but nonetheless significant amount.

In addition to this, according to Comelec Commissioner Rene Sarmiento, the tax scheme will serve to monitor spending in next year’s candidates.

“Aside from boosting government revenue collection, the tax scheme will provide a check-and-balance mechanism and prevent overspending,” he said.

“This new tax scheme will also prevent the entry of illegal funds from narco-politics and prostitution and the use of state resources. We can also prevent quid pro quo or instances when illegal money from donors with vested interests or agenda are spent on a candidate and after the candidate wins, he will enact laws to benefit his campaign financier.”

Tan-Torres agreed, saying, “The new tax scheme will help us identify candidates who are dishonest taxpayers and, thus, help make the campaign spending more transparent.”

Resistence

Despite the potential benefits of the campaign tax, it has met with staunch resistance, especially from opposition candidates, who claim that the measure deliberately puts them at a disadvantage.

The tax would allow the administration “to employ every trick in the book to harass and intimidate our financial backers," said Makati Mayor Jejomar Binay. He added that the tax measure will allow the administration to “pinpoint opposition donors from the business community.”

“Opposition donors will now be vulnerable to harassment, and will think twice about supporting those of us in the opposition,” he said.

Former Education Secretary Florencio 'Butch' Abad, now campaign manager of presidentiable Senator Benigno 'Noynoy' Aquino III, said that the tax gives administration bets the edge over opposition candidates.

He pointed out that most opposition candidates depend on contributions to aid their campaigns, and that withholding five percent would, “adversely affect the ability of those in the opposition to compete in the elections against the administration, which has the government network, the government resources and every source of possible campaign support that can be generated within the government bureaucracy."

"If the BIR is not able to implement taxes based on existing laws, I don't see how they can do it in this campaign," he added.

He described the tax as a “burden imposed” on the upcoming elections, deliberately making it more difficult for the opposition to participate.

"I'm really surprised. What is the basis for this tax? I've been a politician for a long time, I've never encountered this new imposition," he said.

Nacionalista Party (NP) senatorial bet Adel Tamano added that the campaign tax is “anti-democratic.”

"[Financially] Supporting candidates, this is not just part of the electoral process, it's part of the right of free expression. Increasing the burden on our citizens, which makes it difficult for them to participate in the electoral process, is anti-democratic," he said.

Valenzuela Representative Rex Gatchalian, spokesman of the Nationalist People's Coalition, agreed that the tax was an unnecessary nuisance for people who want to participate in the elections through supporting their candidates.

“We have to get people to join the system, to participate by voting, supporting, and watching their votes. Supporting comes in different means--giving campaign contributions, lending their time and their effort. Small donors would want their donations to go a long way," he said.

All systems go

In response to the resistance, the government has insisted that the tax is not discriminative against opposition runners.

“It [tax] is not focused on the candidates but on the goods and services to be bought by candidates. They will all do the same so we do not see any unfair play on this issue,” said Deputy Presidential Spokesperson Anthony Golez.

Tan-Torres clarified that the campaign tax is not a new law, but is simply a new scheme, the implantation of which is within the BIR’s expanded withholding-tax system under the BIR Code. He also said that the BIR will not be disclosing the identity of campaign donors and contributors, even to other government agencies as this would be “against the law.”

Deputy Presidential Spokesperson Lorelei Fajardo added that once the rules of the new scheme are fully explained, “there is no reason for them not to follow.”

As Palad points out however, setting the campaign tax is only the beginning.

“Hence, the next important thing that must be considered by the BIR is the fair implementation of the new withholding tax imposed which may prove to be difficult,” she wrote. “This is the first time the BIR has imposed a withholding tax on campaign contributions, and if the same is administered effectively, the BIR expects about [P1.5 billion] in additional revenues.”

With the period for the filing for Certificates of Candidacy (COCs) ongoing until December 1, and BIR personnel deployed to Comelec offices to register would-be candidates, those who would run in the 2010 elections now have additional worries to mull over in the form of the new campaign tax.

Photo by Daniel Y. Go. Taken from Flickr.com. Some rights reserved.

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