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Philippines—Taxation of Digital Transactions

Oct. 12, 2020, 7:01 AM

Due to the continuing increase in Covid-19 cases in the Philippines, the government has placed different areas under various forms of quarantine, limiting the movement of people to ensure that health standards and measures are maintained. Because of this, several physical offices have been forced to temporarily close, both in the public and private sectors.

During this period, several businesses have shifted towards the use of the internet as a medium of doing business. The number of online and digital transactions have significantly increased, given the restrictions on physical travel, and the convenience of using various electronic platforms as means of obtaining goods and services. With this, the government is currently looking into the taxation of digital transactions in order to provide the government with an increase in revenue, which would be significant given the current Covid-19 situation. This would cover both the exchange of goods through online channels, and the delivery of electronic and online services.

Currently, the Bureau of Internal Revenue (BIR) Revenue Memorandum Circular (RMC) No. 055-13 serves as the guideline on the taxation of online businesses. RMC No. 055-13 covers only online shopping and retail, online intermediary services, online advertisements, and online auctions. RMC No. 055-13 does not impose additional taxes on online businesses, but only sets out and specifies the tax obligations of such businesses under current tax laws and regulations. Current regulations also do not impose tax on provision of remote services by nonresident individuals and corporations.

The Committee on Rules of the House of Representatives is currently deliberating on House Bill (HB) No. 7425 or the proposed “Value-added Tax on Digital Transactions Act.” HB No. 7425 substitutes HB No. 6765 and HB No. 6944.

HB No. 7425 seeks to implement an extraterritorial value-added tax (VAT) collection regime, which has also been introduced in other jurisdictions under a simplified registration system without the need for a local agent or office.

Previous Bills—HB No. 6765 and HB No. 6944

HB No. 6765 was filed in Congress, seeking the enactment of a law entitled the Digital Economy Taxation Act of 2020, on May 19, 2020. HB No. 6765 sought to place the supply of goods and services through the use of electronic or digital means, including those supplied by nonresidents, under the ambit of Philippine taxation, particularly income tax and VAT. HB No. 6765 proposed to place nonresidents under the jurisdiction of the BIR by allowing nonresidents to provide digital services, but only through a representative office or an agent that must be a corporation that is a resident in the Philippines.

Subsequently, on June 3, 2020, HB No. 6944 was also filed in Congress. HB No. 6944 proposed to impose on all digital service providers a digital service tax of 6% of their gross sales from digital services rendered to Philippine-based consumers.

The Committee on Ways and Means of the House of Representatives has approved HB No. 7425 to substitute HB Nos. 6765 and 6944.

Value-added Tax on Digital Transactions Act—HB No. 7425

HB No. 7425 replaces HB No. 6765 and HB No. 6944, and is currently being deliberated on by the Committee on Rules of the House of Representatives.

HB No. 7425, similar to HB No. 6765, expands the definition of VAT to include the sale of goods and services including those which are electronic in nature. Specifically, the bill seeks to amend Section 108 of the National Internal Revenue Code to include the following activities as further examples of sale or exchange of services subject to VAT:

  • the supply by any resident or nonresident person of digital services such as online advertisement services, provision for digital advertising space, and any other facility or service for the purpose of online advertisement;
  • the supply by any resident or nonresident person of digital services in exchange for a regular subscription fee over the usage of the said product or service; and
  • the supply of electronic and online services that can be delivered through an information technology infrastructure, such as the internet.

It is notable that under the current VAT law and applicable regulations, VAT is imposed based on the place of performance of the service rendered, and not where the buyer of the service is located. Thus, VAT is imposed on services performed within the Philippines.

Under the bill, a nonresident digital service provider shall be liable for assessing, collecting, and remitting the VAT on transactions that occur through its digital platform. Such digital service provider shall be liable for the sale of goods or services through an online platform, to a buyer who resides in the Philippines and who acquires taxable services in the Philippines.

HB No. 7425 provides the relevant definitions.

A digital service provider refers to a service provider of a digital service or goods to a buyer, through operating an online platform for purposes of buying and selling of goods or services or by making transactions for the provision of digital services on behalf of any person. It may be:

  • a third party, such as a seller of goods and services who, through information-based technology or the internet, sells multiple products for its own account or one who acts as an intermediary between a supplier and buyer of goods and services, such as a merchandiser or retailer, who collects or receives payment for such goods and services from a buyer on behalf of the supplier and receives a commission;
  • a platform provider for online marketing promotions;
  • a host of online auctions;
  • a supplier of digital services to a buyer in exchange for a regular subscription fee over the usage of a product or service; or
  • a supplier of electronic and online services that can be delivered through an information technology infrastructure (i.e. the internet).

A buyer, on the other hand, refers to any person who resides in the Philippines, who acquires taxable digital services in the Philippines, either for personal consumption or for use in trade or business.

A digital service refers to any service that is delivered or subscribed over the internet or other electronic network, which cannot be obtained without the use of information technology and where the delivery of the service may be automated. It shall include the following:

  • online licensing of software, updates, and add-ons, website filters and firewalls;
  • mobile applications, video games, and online games;
  • webcasts and webinars;
  • provision of digital content such as music, files, images, text and information;
  • advertisement platforms such as provision of online advertising space on an intangible media platform;
  • online platforms such as electronic marketplaces or networks for the sale, display, and comparison of prices of trade products or services;
  • search engine services;
  • social networks;
  • database and hosting such as website hosting, online data warehousing, file sharing and cloud storage services;
  • internet-based telecommunication;
  • online training such as provision of distance teaching, e-learning, online courses and webinars;
  • online newspapers and journal subscription; and
  • payment processing services.

A nonresident digital service provider is liable to register for VAT, where its gross sales or receipts in the past 12 months exceed 3 million pesos ($61,700), or where there are reasonable grounds to believe that its gross sales or receipts in the next 12 months will exceed 3 million pesos. A VAT-registered nonresident digital service provider may issue electronic invoices or receipts. Where a nonresident digital service provider is not duly registered with the BIR, payments made to such service provider shall be subject to a 12% withholding tax at the time of payment.

In order to carry out the proposed changes, the BIR will establish a simplified automated registration system for nonresident digital service providers, subject to the rules and regulations to be prescribed by the Department of Finance.

In order to foster global consistency and a smooth implementation of extraterritorial VAT reporting regimes, it is recommended that the Philippines adopt the best practices across the region. The goal is to make the implementation of the regime the most efficient for both the tax administration and the nonresident suppliers. In order to ensure full compliance, it is important to implement a registration and payment system that is simple for nonresident multinational companies to comply with on a scalable and consistent manner without having the burden of individualized local requirements.

In these uncertain times of the Covid-19 pandemic, it is likely that more businesses and service providers will move online to ensure the health and safety of their personnel and the public. As it stands, the current VAT regime presupposes that the transaction transpired within the Philippines, in order to be subject to VAT. Under HB No. 7425, only virtual presence will be required, provided that the service is obtained by a buyer located in the Philippines.

Planning Points

Businesses who are engaged in digital transactions, both residents and nonresidents, should assess their current business models and practices in order to prepare for the possible imposition of VAT on goods and services which are electronic in nature, and increased registration requirements.

Businesses must also keep abreast of legal developments in understanding how this proposed legislation may affect not only their VAT liabilities, but also how this bill may give rise to other Philippine taxes such as income tax and withholding tax.

Ronald Bernas is a Partner, Kristine Anne Mercado-Tamayo is a Partner and Selynn Co is an Associate at Quisumbing Torres, Philippines.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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