by: Arnina Beatrice G. Quiros
The rise of digitalization as a component of commerce has been evident in the past decade – now more than ever during this time where we are held back by the COVID-19 pandemic. The lockdowns or community quarantines imposed by the Government resulted in limited mobility, thus forcing consumers to shift spending through online means. As the Country continues to transition from the traditional brick-and-mortar methods of doing business to digital, it is imperative for the tax system to also adapt to these developments in business.
In 2013, the Bureau of Internal Revenue (BIR) reiterated the taxpayers’ obligations in relation to online business transactions through the issuance of Revenue Memorandum Circular (RMC) No. 55-2013. Like any other business establishments, persons who conduct business through online transactions and its permutations are required to register with the BIR, withhold and remit the proper taxes and file the applicable tax returns, among others. More recently, still, RMC No. 60-2020 was issued to remind persons doing business through digital means to register with the BIR. With all these issuances in place, the taxing authorities have indeed identified the value created online and its corresponding tax implications. However, ambiguities still surround the taxation of digital transactions, more particularly those that cross international borders.
Last 19 May 2020, House Bill (HB) No. 6765, otherwise known as the “Digital Economy Taxation Act of 2020” was filed in response to the urgency of generating more funds to combat COVID-19 and in anticipation of the increased digitalization of the country’s economy. This Bill, introduced by Albay Representative Joey Salceda, seeks to subject to the twelve percent (12%) value-added tax (VAT) services rendered electronically in the course of trade or business, digital advertising services supplied by any resident or non-resident, subscription-based services supplied by any resident or nonresident and all other services that can be delivered through an information infrastructure (i.e. the internet).
For purposes of the Bill, persons responsible for the appropriate Philippine taxes are identified as follows:
Network orchestrators and electronic commerce platforms, under the Bill, will be appointed as withholding agents of the seller for VAT purposes should payment for the VATable sale go through them and have been derived from membership in a network orchestrator system or electronic commerce platform. The VAT withheld shall be remitted within ten (10) days following the end of the month of such withholding. Network orchestrators shall also withhold tax on the income and/or revenue derived by the persons through their membership in the network orchestrator system. Further, non-residents who render digital services, or those that act as network orchestrators or electronic commerce platforms shall have the privilege to do business in the Philippines exclusively through a representative office or an agent which shall be a resident corporation in the Philippines.
While the Bill seems advantageous for it is projected to yield an estimated Php29.1 billion in annual revenues, the Congress must still thoroughly assess its provisions and address the underlying complexities of taxing digital transactions especially those that involve foreign service providers. Under the current provisions of the Tax Code, non-residents not engaged in trade or business in the Philippines are generally not subject to Philippine income tax unless they derive income from sources within the Philippines. Further, services, when performed by non-residents in the Country, shall be considered as Philippine-sourced income subject to VAT which will be withheld and remitted by the Philippine-based buyer. In the case of digital transactions, it may be arguable whether the income earned by a non-resident through services rendered online are Philippine-sourced or otherwise. Similarly, a common observation among tax practitioners is that the enactment of the Bill still would not address rules on the situs of income earned using online platforms.
The Organisation for Economic Cooperation and Development (OECD) has also recognized the tax challenges brought about by the digitalization of the economy. In 2019, a “unified approach” under Pillar One was proposed where a new nexus would not depend on the physical presence in the user or market jurisdiction but rather on sales. Under current tax laws, a non-resident foreign corporation shall be taxable only on its business profits if it has a permanent establishment in that territory. However, as digitalization of services continues to thrive, we see more and more companies being able to do business in a jurisdiction without having to establish a “physical presence”. In view of the foregoing, the OECD identified the need to address the proper allocation of taxing rights that no longer exclusively circumscribes by reference to physical presence. In the meantime, HB No. 6765 sought to address this issue by requiring non-resident suppliers of digital services, network orchestrators and electronic commerce platforms to do business in the Philippines exclusively through a representative office or an agent which shall be a resident corporation in the Philippines. Revenues derived from the aforesaid services shall, for tax purposes, be revenues generated by the representative office of agent. However, it is to be noted that under Section 1(c) of the Implementing Rules and Regulations of the Foreign Investments Act, a representative office generally does not derive income from Philippine sources —it should only undertake activities such as, but not limited to, information dissemination and promotion of the Company’s products as well as quality control of products.
Among our neighboring countries in Southeast Asia, Singapore and Malaysia have already imposed taxes on cross-border digital services since 01 January 2020. With the recent approval of the House Committee on Ways and Means on the still unnumbered substitute bill to HB No. 6765, the Philippines has taken a step closer to establishing a clearer and more comprehensive tax system aimed to capture the value created in virtual avenues. Given that the measure is still in the early stages of the legislative process, we may expect it to undergo more refinements as further deliberations are made in Congress. Should this Bill be eventually passed into law, we look forward for ambiguities surrounding digital transactions to be further clarified as we progressively transition to total digitalization.
Arnina Beatrice G. Quiros is an Associate of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.
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