Advertising anyone?

In this age of commercialism and consumerism, advertising has become a tool for various businesses to showcase their products as the “must haves” to continually fuel our incessant desire for instant gratification. It has become a driving force to expand market base and to deepen market penetration. As a dynamic industry, it constantly reinvents the invented to make it palatable to the scrutiny of meticulous consumers wanting nothing else but the value they have paid for. Hence, advertising has become a lucrative enterprise that no shrewd businessman could do without.

As an effective tool in any business, the advertising industry has been constantly subjected to examination by the tax office. Recently, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 63-2012, dated Oct. 29, 2012, clarifying issues affecting invoicing and recording of income payments for media advertising placements. The BIR has also issued RMC No. 91-2012 dated Dec. 28, 2012 as a supplement to RMC No. 63-2012.

In RMC No. 63-2012, the BIR has recognized the tripartite institutional structure of the advertising industry which constitutes the advertising agencies, media suppliers and advertisers.  Likewise, it has recognized the different billing procedures of various advertising agencies.  In this circular, the BIR provided for a uniform treatment in invoicing and recording of income payments where the advertisers pay the media supplier for the total cost of the media advertisement inclusive of creative and media services, advertising commission or service fees and value added tax (VAT).

 The media supplier shall bill the advertiser for the total amount of the contract. The advertiser shall withhold two percent (2%) on the entire invoice amount and issue a Certificate of Creditable Income Tax Withheld at Source (BIR Form 2307) for the media supplier.  Hence, the commissions of the advertising agency are included as part of the entire invoice of the media supplier and recognized as part of the advertising expense of the advertiser.

For its part, the media supplier shall issue its VAT invoice/official receipt upon receiving the payment from the advertiser and shall report the entire amount as business income for income tax purposes.

The advertising agency, on the other hand, shall bill the media supplier for its commission/service fee. The media supplier shall withhold two percent (2%) from the commission/service fee of the advertising agency and shall likewise issue BIR Form 2307 for the advertising agency.

For its part, the advertising agency shall issue its VAT invoice/official receipt upon receiving the payment from the media supplier and shall report the amount of VAT based on the commission/service fee received.

In RMC No. 91-2012, the BIR has recognized a split payment agreement among the parties and provided for treatment in the invoicing and recording of income payments under such agreement. Under this agreement, the advertiser may contract directly with a media supplier and an advertising agency for media advertising placements.  The payments made directly by the advertiser to the media supplier and to the advertising agency are limited to the cost of services provided by each entity. The advertiser is billed separately by the media supplier for the total cost of production and media placement and by the advertising agency for the service fee. Hence, the advertising expense pertaining to the media supplier and the service expense pertaining to the advertising agency are recorded separately by the advertiser.

However, RMC No. 91-2012 does not provide for the withholding tax, VAT and invoicing requirements for the income payments under the split payment agreement.  Although it makes sense that these requirements would pertain only to the respective portions of the media supplier and the advertising agency.  In other words, the media supplier should bill its portion only. The same goes with the advertising agency.

As businesses grow and cater to the whims of the all important consumer, advertising will continue to evolve and adapt to the tides of market demands. With this comes the scrutiny by the tax office of the advertising business as a growing industry being eyed as a revenue maker for the government. As the taxation of each party to the advertising contract is inevitably intertwined with the taxes applicable to the other party, it makes sense that a standard be provided to avoid confusion in the long run with the invoicing and recording and ultimately tax reporting requirements.

Valerie Jill S. Reyes is a supervisor from the tax group of Manabat Sanagustin & Co. (MS&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The view 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].