It is high time for countries like the Philippines to collect value-added tax (VAT) from the digital economy to offset substantial foregone revenues felt across the region, according to a World Bank report.
The World Bank Group’s flagship World Development Report 2021 titled “Data for Better Lives” showed that in the Philippines, Indonesia, Malaysia, Singapore, Thailand and Vietnam, a combined $5 billion in potential tax revenues were lost due to their failure to apply current VAT rules on digital services.
If unaddressed, revenue losses across these six Association of Southeast Asian Nation countries would rise to more than $6 billion this year and nearly $8 billion next year, World Bank estimates showed.
The uncollected taxes could further balloon to more than $9 billion in 2023, $11 billion in 2024 and almost $14 billion in 2025.
The World Bank said these estimates reflected the indirect VAT potential of business-to-consumer e-commerce in the six countries.
“Evidence from East Asia indicates that the rapid growth of business-to-consumer e-commerce has resulted in equally significant growth in the tax potential of the sector, with the indirect tax potential growing some eightfold, rising from $460 million in 2015 to $3.7 billion in 2019,” the World Bank said.
Rapid growth
“Other aspects of the digital economy, including online media and food delivery, have seen similar rapid growth in sales and indirect tax potential,” the World Bank added.
To take advantage of this up-and-coming source of needed tax revenues, the World Bank urged amending antiquated tax rules. “One example is the VAT registration threshold, which is designed to balance having a broad tax base to maximize revenue mobilization while keeping administrative and compliance costs reasonable. In an increasingly digitalized world, the lower transaction costs associated with paperless tax collection may make it more feasible to include smaller actors.”
Pending in Congress are bills aimed at collecting 12-percent VAT from digital goods and services, similar to moves in neighboring Indonesia and Malaysia.
Amid the “new normal” wrought by the COVID-19 pandemic, the Department of Finance and the state planning agency National Economic and Development Authority (Neda) had both sought to establish a taxation framework and infrastructure to reap the gains from the booming digital economy.
Offset
In May last year, House ways and means committee chair and Albay Rep. Joey Salceda pushed for taxing digital services—specifically subscriptions to video and music streaming apps, advertisements on social media sites like Facebook, and making online sale platforms as withholding tax agents—to offset an estimated P120 billion in foregone revenues once the government cuts corporate income taxes to 25 percent to soothe the pain inflicted by the pandemic on businesses.
He noted that other countries have started taxing these digital services ranging from 5 percent to as high as 19 percent to boost government revenues.