Tax Articles

Fitting EWT to FinTech Transactions

By: Atty. Jomel N. Manaig

Atty. Jomel N. Manaig Junior Partner   +632 8403-2001 loc.380 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

In my previous article, “The Phygital Revolution: How FinTechs should navigate,” we dipped our toes to see the prevalent impact of financial technology (FinTech) to our daily lives. Using FinTech, we can buy or pay for something with just a tap on our smartphone or a click on our mouse. It has been a staple of our daily transactions.

My article also touched on the lack of updated tax rules to specifically cater to transactions involving FinTech entities. This can lead to tax exposures and inconsistent, if not improper, implementation of existing tax regulations.

Several tax rules and regulations affecting FinTech entities which needs tweaking come to mind. But for today, let us focus our attention on the tax rules and regulations involving expanded withholding taxes. To get us on the same page, we shall first go over the basic tenets of the expanded withholding tax system (EWTS, for short).

Under the EWTS, tax is withheld by the withholding agent on income payments to its payee which is creditable to the latter’s income tax due for the taxable quarter/year in which the particular income was earned. A payor is considered as a withholding agent, and is required to withhold tax, only in relation to income payments enumerated in Revenue Regulation (RR) No. 2-98. Such obligation to withhold arises at the time the income is paid or payable, whichever comes first.

The expanded withholding tax system, in its current form, is incompatible with and problematic to apply to FinTech-powered transactions.

First, the EWTS does not take into account the true nature of FinTech entities which are pass-through entities. FinTech entities, by design, bridge the transaction between the parties (the buyer and the merchant) and charge a fee for such service. Once a purchase has been made, the buyer will cause the corresponding payment using the facilities of the FinTech entity. The latter will then remit the said payment to the merchant to complete the transaction. In other words, FinTech entities only facilitate the settlement of the transaction between the buyer and the merchant.

With this, it is clear that the remittance done by the FinTech entity to the merchant is not considered as an income payment within the context of the EWTS. Not being an income payment, the FinTech entity cannot be considered as a withholding agent and should not be required to withhold taxes on the said remittance. If at all, the characterization of an income payment can be attributed to the payment by the buyer which is the actual recipient of the goods and/or services of the merchant.

Second, the merchants are not considered as suppliers of goods and/or services to the FinTech entities. The merchants do not sell their goods and/or services to the FinTech entities. Considering that there is no sale of goods and/or services, there is also no income payment made by the FinTech entities to the merchant.

Third, the obligation to withhold had already passed by the time the FinTech entity does its remittance to the merchant. The “time the income is paid or payable, whichever comes first” occurred when the buyer (who is the purchaser of the goods and/or services) paid the purchase price through the FinTech entity. Following the requirement of the EWTS regulations, this is the time that the withholding should have occurred.

While it should be mentioned that there are also some regulations specifically requiring “payment gateways” to withhold taxes, it still does not resolve the issues mentioned above. Further, the said regulations mentioned specific entities considered as “payment gateways” but it clearly did not mention FinTech entities.

If the tax authorities pursue the implementation of the EWTS to the FinTech entities, it should likewise resolve other related issues. For example, tax audits normally utilize third-party information to determine the sales and/or purchases of a particular taxpayer. If the purchaser (i.e. the buyer) and the withholding agent (i.e. the FinTech entity) are different, how will it affect the matching with the corresponding sales of the merchant? Left as it is, there would be significant disparities which may leave taxpayers vulnerable to erroneous assessments assumptions.

Seeing the incongruence between the EWTS and its application to FinTech entities, it is in the best interest of both the tax authorities and the FinTech entities if the EWTS rules and regulations are updated. This would ensure a more harmonious tax administration that would result in fewer controversies.