Social media spawned the rise of popular and highly followed content creators — ordinary individuals outside of show business who become celebrities overnight by creating viral content through their digital platforms. Realizing the advertising potential of these content providers, also known as “social media influencers,” more and more companies partner with them to spread and maintain awareness of their brands and products among the influencers’ millions of followers.
This became even more apparent during the lockdowns resulting from the pandemic, when an increasing number of people plugged into the online world to stay connected.
The growing business of social media influencing caught the attention of the Bureau of Internal Revenue (BIR), which recently released Revenue Memorandum Circular (RMC) No. 97-2021 to clarify the taxation of any income received by social media influencers.
INFLUENCERS LIABLE FOR INCOME TAX AND VALUE-ADDED TAX OR PERCENTAGE TAX
The BIR emphasized that social media influencers are liable for Income Tax and Value-Added tax or Percentage Tax unless the law clearly provides for an exemption. Moreover, social media influencers are required to register as taxpayers with the BIR, maintain books of account, and file the appropriate tax returns.
BROADENING ENFORCEMENT OF TAXPAYER COMPLIANCE
This move by the BIR appears to be consistent with its renewed drive to enforce tax compliance. The recent focus on social media influencers appears to be one of the programs to remind the sector of their tax obligations, starting with the emphasis that earnings from social media platforms, are in fact, taxable income. If in the past, the BIR’s enforcement drive focused mainly on corporate taxpayers, it appears to be sending the message that tax compliance is for all taxpayers, whether individual or corporate.
Among the notable points in RMC No. 97-2021 is that the BIR went as far as discussing the tax impact if the social media influencer is taxed by a foreign jurisdiction on income paid by a foreign corporation. Its discussion also includes remedies to avoid double taxation, such as availing of the benefits of the applicable tax treaty.
On that point, the BIR is now harnessing increasing coordination among foreign tax authorities by reminding social media influencers that it has the power to obtain information from foreign tax authorities. By utilizing the Exchange of Information provisions included in tax treaties, the BIR emphasized that it has the capability to determine if the social media influencers correctly disclosed their earnings in their tax returns.
It then stands to reason that the BIR can likewise wield its power of obtaining information from foreign tax jurisdictions to also ascertain the correct amount of foreign-sourced income earned by other taxpayers. For instance, the BIR may determine the amount of any foreign-sourced dividends received by a domestic corporation using the Exchange of Information tools under the tax treaties, to determine whether these dividends were declared by the corporation for tax purposes.
The power to obtain information through Exchange of Information is only one of the weapons in the BIRs arsenal to oversee tax compliance. It may be worth remembering that the National Internal Revenue Code itself gives the BIR the power to assess the proper tax based on the best evidence obtainable. The BIR has been known in the past to use commercial advertisements to approximate the taxpayer’s net worth.
While RMC No. 97-2021 focused its discussion on the tax obligations from the perspective of social media influencers, corporations who partner with these individuals may well be reminded that any income payments to such individuals or corporations may also give rise to withholding obligations. As withholding tax agents, corporations are required to withhold a specific amount of income on their income payments. The domestic corporation paying the social media influencer is required to withhold tax on payments at a rate anywhere from 2% to 15%, depending on how the payment is characterized under the expanded withholding tax system. Failure to withhold the correct amount of tax can give rise to potential deficiency withholding tax assessments that can be raised in a tax audit.
On this note, a withholding tax issue may arise on the part of corporations with respect to free products that they give to the social media influencer. RMC No. 97-2021 emphasizes that the fair market value of free products received by a social media influencer in exchange for promotion on the digital platform is to be treated as income. If these free products are to be treated as income payments, a question may be raised on how the corporation giving away the free products is to apply withholding tax rules. Since the payment is made in the form of goods, and not cash, what practical approach can be adopted by the corporation providing the free products to meet its withholding tax obligations? Are these payments through free products even subject to expanded withholding tax? These points may be worth considering both by the payors and the tax authorities themselves.
Another potential impact of this regulation is the reputational or perception issue of the partnering corporation. If the social media influencer is deemed to be non-compliant with tax filing obligations, it is possible that the corporation partnering with the social media influencer can likewise be questioned by the BIR if it correctly withheld taxes on any payments that may have been made to the non-compliant social media influencer. This can be an additional issue to hurdle in the event of a tax audit on the partnering corporation.
TAXES FOR COMPLIANCE AND SOCIETAL CONTRIBUTION
While RMC No. 97-2021 trains its attention on social media influencers, the broader implications are that the BIR has tools at its disposal to remind all taxpayers of their tax obligations and to enforce compliance. Moreover, this regulation reminds us that all income, no matter how it is sourced, cannot escape the taxing power of the state. This is especially relevant in these times, in which taxpayers, both individual and corporate, can help by providing the resources to fight the pandemic. This makes these taxes not just an obligation carried out of compliance, but also our contribution to help society heal.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.
Betheena C. Dizon is a Tax Partner of SGV & Co.