Tax Articles

Withholding Tax on Remittances of Online Payment Portals to

Sellers

By: Atty. Rodel C. Unciano

Atty. Rodel C. Unciano Partner   +632 8403-2001 loc.380 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

In a recent development under Revenue Regulations (RR) 16-2023, the Department of Finance amended the provisions of RR 2-98 to impose a creditable withholding tax (CWT) on gross remittances made by electronic marketplace (e-marketplace) operators and digital financial services providers to sellers/merchants for goods and services sold/paid through the former's platform/facility. Is this permissible under our laws?

Withholding of taxes at source is a procedure for collecting income tax. It was devised to: 1) provide taxpayers a convenient manner to meet their probable income tax liability; 2) ensure the collection of income tax; and 3) improve the government's cash flow (G.R. No. 213860).

The imposition of CWTs on income payments is by virtue of the mandate of Section 57 of the 1997 Tax Code, as amended, which authorizes the Secretary of Finance (SOF), upon the recommendation of the Commissioner of Internal Revenue, to require the withholding of a tax on certain income payments, pursuant to the criteria laid down in the Tax Code, which shall be at a rate of not less than one percent (1%) to a maximum of not more than thirty-two (32%) percent under the old law, but the Tax Reform for Acceleration and Inclusion (TRAIN) Act reduced the maximum rate from thirty-two percent (32%) to fifteen percent (15%) beginning January 1, 2019.

While the Tax Code authorizes the SOF to require the imposition of withholding taxes, it does not specify the items of income that are to be covered. The Code merely provides that the SOF may require withholding of tax on items of income payable to natural or juridical persons residing in the Philippines. It does not also specify the type of payor who is required to withhold the tax. Also, it does not provide the specific rate of withholding tax other than providing a range of the lowest and highest withholding tax rate that may be imposed.

So, therefore, the SOF has the discretion to identify the types of income payments that are subject to creditable withholding taxes and the corresponding rates that may be imposed. The SOF has the discretion as well to identify the payors who are mandated as withholding agent.

Over the years, the SOF has since issued several issuances requiring the withholding of tax on certain income payments. And under pertinent regulations that have been issued, specific rates of withholding taxes are being imposed on certain income payments, depending upon the nature of the income payments. For income payments not specifically enumerated under the regulations as subject to specific withholding tax rates, taxpayers constituted as top withholding agents (TWAs) are being obliged to remit one percent (1%) and two percent (2%) CWTs on their purchase of goods and services, respectively.

And in a recent development under RR 16-2023, the SOF amended the provisions of Sections 2.57.2 and 2.57.3 of RR 2-98 to impose a withholding tax on gross remittances made by e-marketplace operators and digital financial services providers to sellers/merchants, for goods and services sold/paid through the former's platform/facility.

Under the regulations, one-half (1/2) of the gross remittances by e-marketplace operators and digital financial services providers to the sellers/merchants for the goods or services sold/paid through their platform/facility is now subject to one percent (1%) CWT, except in the following instances:

1) The annual total gross remittances to an online seller/merchant for the past taxable year has not exceeded Five Hundred Thousand Pesos (P500,000.00);
2) The cumulative gross remittances to an online seller/merchant in a taxable year has not yet exceeded Five Hundred Thousand Pesos (P500,000.00); or
3) The seller/merchant is duly exempt from or subject to a lower income tax rate pursuant to any existing law or treaty.

Electronic marketplace is defined under the regulations as a digital service platform whose business is to connect online buyers/consumers with online sellers/merchants, facilitate and conclude the sales, and process the payment of the products, goods, or services through such digital platform. On the other hand, digital financial services platform refers to the financial technology provided by digital financial services providers which are capable of offering a wide array of services of financial nature that are made available to the public through the internet mobile application, or other similar means.

As the imposition of withholding tax at source has been delegated by law to the SOF, the imposition of CWT on remittances made by online payment portals to merchants/sellers pursuant to RR 16-2023, as clarified by Revenue Memorandum Circular 8-2024, is therefore in accordance with the authority vested by law. Thus, online payment portals have no choice but to faithfully comply with their new obligations as withholding tax agents.