Tax Articles

ONLINE in the Time of Corona

By: Atty. Lino Ernie M. Guevara

In his 1985 opus, “Love in the Time of Cholera”, Colombian Nobel laureate, Gabriel García Márquez, wrote that the symptoms of love were the same as those of cholera. Today, during and post-quarantine era, the symptoms of life all point to that new normal in this time of corona.

As we gear up to get back to “normalcy”, whether for work or personal routines, we should adapt and do a paradigm shift for the new ways of doing the old. Foremost would be that online transactions may be surging in this time of social distancing when avoiding crowds and contactless dealings reign supreme.

It was projected for the Philippines to post a tremendous growth in e-commerce. There are 73 million internet and social media users in the country according to Datareportal.com. The Philippines’ eGDP, i.e., derived proportion of the sum of online transactions to the country’s GDP, stands at 11% but aimed to reach 25% (Digitalfilipino.com). Google and Temasek’s eConomy SEA 2019 Report showed that the Philippines’ internet economy was valued at approximately US$7B in 2019, growing from a mere US$2B in 2015. But the real excitement about the Philippines is that it is still a relatively untapped market by regional and global players, especially for fintech companies involving digital payments, pegged by BSP at only 12% (from a measly 1% in 2013), thus, having room a plenty for explosive growth.

2019 also saw the passage of laws for innovation and startups targeting tech companies and micro small and medium enterprises (MSMEs). Republic Act (RA) No. 11293 (“Philippine Innovation Act”) adopts innovation (i.e., creating new ideas for improved policies, products or processes), as vital component of our development policies to promote the growth of MSMEs as part of the local and global supply chain. An Innovation Fund is to be set-up with an initial revolving fund of Php1B. Its IRR was just signed early this year. Second was the “Innovative Startup Act” (RA 11337) providing incentives for the establishment of innovative new businesses, specifically for startups and startup enablers, including accelerators, incubators, investors, organizers and other support organizations. There will be a Startup Grant and Venture Fund to supplement the grant fund and match investments by selected investors. A Startup Special Economic Zone will be established to grant incentives and startup visas to be issued for the owner, employee and investor. All these could very well stimulate further the interest of and growth by startups, including fintech companies.

With possible exponential growth in the digital economy (or what I call “e-Comnomy”), we should examine our existing legal and taxation framework on online taxation. Both DOF and BIR declared the intent to capture those untaxed online transactions for additional revenue.

Currently, what we have is still the Electronic Commerce Act of 2000 (RA 8792) giving legal effect, validity and enforceability to electronic data and messages as well as electronic signature. During the quarantine, this was heavily relied upon by government agencies such as SEC and BSP in accepting online submissions and e-signatures. Its IRR provided that rule interpretation should give due regard to the UNCITRAL Model Law on Electronic Commerce as its international origin and the generally accepted principles of international law and convention on electronic commerce. We also enacted a law governing cybercrime offenses.

For online taxation, the BIR issued 7 years ago, Revenue Memorandum Circular (RMC) 55-2013 subjecting to tax business transactions such as online shopping or retailing, online intermediary service, online advertisement and online auction. Like any other brick-and- mortar businesses, these online entities are required to be BIR-registered, obtain and issue invoices and receipts, and pay income and withholding taxes and VAT or percentage tax, among others. Amidst the popularity of transport hailing apps in traffic-burdened Manila, RMC 70-2015 was then issued requiring transport network companies (TNCs) and their partners (i.e., car owner or driver) to register with the BIR, secure and issue official receipts and be subject to income and business taxes. If the TNC or its partner is a holder of Certificate of Public Convenience (CPC) issued by LTFRB for a franchise to operate, it will be treated as a common carrier with its gross receipts subject to 3% common carriers tax. If a non-holder but having merely an LTFRB accreditation, it is regarded as a land transportation service contractor subject to 12% VAT or 3% percentage tax, depending on its registration or annual gross receipts.

Both RMCs specified the requirement that existing tax laws and issuances on the tax treatment of purchases and sale of goods or services shall be equally applied with no distinction on whether or not the marketing channel is the internet or the typical physical medium. But we know that digital taxation is not that simple, here or abroad, even in developed countries.

From the time the above laws and circulars were issued, revolutionary changes in technology ensued affecting online transactions and, thus, not covered by said RMCs. Common now are movie and video streaming and virtual gaming, apps downloading, hosting, storage or cloud computing, using search engines, e-wallets, high frequency trading or block chain technology and videotelephony, among others. Our laws and regulations should be updated or new ones enacted to cover these new technologies and transactions. Secondly, the application of the RMCs was premised on the registration of said businesses similar to those having physical operations. But as we know, online transactions buck physical geography or territoriality, involving parties in more than one taxing jurisdictions even. Anent to these cross-border transactions is the critical issue of applying in digital realm the old traditional framework of permanent establishment (PE) or physical presence under the tax treaties before income tax attaches. Other countries in taking the unilateral approach, imposed instead taxes based on consumption by end-users or value creation in that jurisdiction, but the same are not without controversies and resistance. Some of our ASEAN neighbors already tried imposing indirect taxes such as Singapore’s Goods and Services Tax on sales of foreign digital companies and Malaysia’s Sales and Services Tax on digital services, while Indonesia followed suit with VAT on intangible goods and services sold through electronic platforms and also required foreign sellers and e-commerce providers to appoint a representative in the country.

The OECD, on the other hand, under Pillar One proposes a unified approach, giving countries the right to tax profits of international businesses regardless of whether they have a base in the country or not. As already endorsed by some countries early this year, it may be the basis for a consensus-based solution on digital taxation, which we can also evaluate if we can adopt. Its Pillar Two refers to proposal to counter profit-shifting by multinationals which are subject to low or zero taxation by imposing a global minimum tax. We should note all these developments, gauge them and get a good mix of what would work best in our jurisdiction, especially in the area of implementation and monitoring. It is time to review our basic rules on source and situs of income, PE expansion and royalties, among others, on how they can encompass digital transactions. Thus, amendments to our tax laws and regulations or even passage of new bills may be timely to cover and map out more defined legal bases, parameters and scope for online taxation. News had it that Congress wishes to “amend” the CITIRA Bill given the recent developments due to the pandemic, so other inclusions and issues may still be looked at.

It is well to consider all the global technological advances and regulatory approaches in digital taxation and contextualize them against our own rules. We are all for the government to capture equitably the e-commerce taxes rightly due, cognizant of the updated and generally-accepted international taxation framework. But the bigger challenge is striking that balance, of taxing without impeding the development of a sunrise sector promising to be a driver of economic growth and potential revenue source, especially in the time of corona.