BIR Ruling

October 23, 1973 2nd Indorsement Respectfully returned to the Honorable, the Secretary of Finance, Manila, the within basic letter dated May 29, 1973 of the Honorable, Secretary of Public Information, appealing in behalf of the Association of Philippine Advertising Agencies, relative to the question as to the proper basis for the computation of the 3% contractor's tax collectible from advertising agencies. cdtech It is claimed that in a ruling issued on August, 1970 this Office allegedly held that the billings of advertising agencies to their clients are gross receipts and are subject to the 3% contractor's tax on gross receipts. It is, however, the position of the Association of Philippine Advertising Agencies, as buttressed by the Department of Public Information that the 3% contractor's tax collecting from advertising agencies should be based only on the 15% of the gross billings paid to them by media as commission and not on the gross billings, as allegedly ruled by this Office, since 85% thereof belongs to the media. BIR Ruling No. 70-042 dated August 27, 1970, the ruling alluded to, was issued in response to the query as to the internal revenue taxes due from a person engaging in the business as media representative to sell advertising space for both local and foreign publications under the facts stated in the inquiry. In said ruling, this Office stated that as the person (inquirer) was conducting an advertising agency, who is considered a business agent under Section 194(v) of the Tax Code, and, therefore, he is subject to the annual fixed tax of P50.00 and to the 3% tax on his gross receipts or compensation in accordance with Sections 182(A)(1) and 191(18), respectively, of the Tax Code. Nowhere in said ruling did this Office held that the 3% contractor's tax is based on gross billings. Be that as it may, it may be stated that this Office is not unmindful of the nature of the business of advertising agencies. An advertising agency is considered a business agent within the contemplation of Section 194(v) of the Tax Code. In the business of an advertising agent, he occupies himself in securing advertising, in preparing the copy, and in causing the copy to be disseminated to the public through the various media. Thus, in the case of I. Beck, Inc. v. Alfonso, 58 Phil. 344, the Supreme Court said: "The newspaper sells space for advertising purposes; the broadcasting station sells time for advertising purposes. In the case of the newspaper to our knowledge, it has never been contended that because it contains advertising for which compensation is received the newspaper publisher is thereby engaged in the business of an advertising agent. We may take cognizance of what is familiar to everyone, which is that in the business of an advertising agent, he occupies himself in securing advertising, in preparing the copy, and in causing the copy to be disseminated to the public through various media. The advertising agent may utilize the columns of a newspaper or he may utilize the time of a broadcasting station. The person thus engaged in business is an advertising agent, but the operator of the radio station is not." From the foregoing, it is apparent that the advertising agent solicits advertising from the client-advertiser, prepares advertising materials and delivers the same to the media which actually renders the advertising services. Under the circumstances, it cannot be denied that a part of the money received by the advertising agency represents compensation for advertising services rendered by the media. In short, a part of the money received by the advertising agency is especially earmarked for the media. Such being the case, much money especially earmarked for the media does not form part of the gross receipts for purposes of the 3% contractor's tax payable by an advertising agency. In view thereof, this Office is of the opinion that the 3% contractor's tax payable by advertising agencies shall be computed on the basis of the amount received from the client-advertisers exclusive of that portion which is paid to the media. cd (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5