Taxation of the digital economy

The Bureau of Internal Revenue (BIR) has been making deficiency tax assessments on the income payments made by local companies and agencies to nonresident foreign corporations (NRFCs), particularly tech giants like Amazon, Google and Facebook (or Meta). The deficiency tax assessments include nonwithholding of final tax on income payments made online e.g., Facebook Ads plus 25-percent surcharge, 12-percent interest and compromise penalties.

As a general rule, the income payment made to NFRCs is subject to 25-percent final withholding tax and 12-percent final withholding value added tax (VAT). Unfortunately, as the withholding agent, the local company or agency is responsible for withholding taxes. Otherwise, BIR will run after them, and not after the NRFCs, for failure to withhold taxes.

While most of them are registered in the United States which has a tax treaty with the Philippines, they also use other entities registered in tax havens or other countries without existing tax treaty agreements. This may pose a challenge as tax treaty preferential rates and exemptions from final withholding taxes may not be available.

Revenue Memorandum Order No. 14-2021 sets the guidelines and procedures to streamline the availment of tax treaty benefits. This is applicable to NRFCs regularly transacting with the Philippines as long as they are using the entity registered in the United States or countries with tax treaty with the Philippines like Google.

Digital service taxes

The digital economy has been growing dramatically over the years. In the Philippines, it has exponentially increased revenues from abroad, especially for content creators, livestreamers and online gamers.

Similarly and more significantly, tech giants like Amazon, Google and Facebook derive income from the Philippines without having a physical presence and are not subject to corporate income tax.

European countries like Austria, France, Italy, Spain, Turkey and the United Kingdom have implemented a digital service tax (DST). Other countries like Belgium and Czech Republic have published proposals to enact DST, and Norway has officially signified its intention to implement such a tax.

According to the Tax Foundation, the proposed and implemented DSTs differ significantly in their structure. For example, Austria only imposes tax on online advertising. France includes digital interface and data transmission. The tax rates range from 1.5 percent to 7.5 percent.

However, the DST is considered a mere interim tax measure until an agreement is reached at the Organization for Economic Cooperation and Development (OECD).

OECD Pillar 1

Like in other countries, billions of dollars in revenues are generated in the Philippines by these tech giants but are not subject to corporate income tax.

To address this, the OECD, where the Philippines is a member-country, has been hosting negotiations with more than 130 countries to adopt the international tax system. OECD proposed Pillar 1 which would require the tech giants to pay some of their income taxes where their consumers are located.

Pillar 1 will replace DST and other taxes being imposed by other countries on digital companies. This is more beneficial to countries like the Philippines since the focus is changing on where profits are taxed.

Digital economy taxation

Notwithstanding the proposed Pillar 1 by OECD, there is a pending Digital Economy Taxation bill (House Bill No. 6765) in the House of Representatives. Salient features include:

• Network orchestrators such as ride-hailing companies (e.g. Grab, Angkas), rental platforms (e.g., Airbnb, Agoda, Booking.com) must act as withholding tax agents;
• Imposition of 12-percent VAT on digital or electronic goods and services rendered electronically; and,
• Imposition of 12-percent VAT on digital advertising services (e.g., Google and Facebook ads), subscription-based services (e.g., Netflix, Spotify) and any online services;
• It will also require the tech giants to register a local company with a resident agent where revenues derived from the Philippines will be declared and be subject to corporate income tax.

Annual tax health check

Whether the Philippines enacts HB 6765 or adopts the proposed Pillar 1 by OECD, individuals and corporate entities, domestic or NRFC must fully comply with existing tax rules and regulations to avoid being slapped with hefty penalties and compromises.

As early as 2013, the BIR already issued Revenue Memorandum Circular No. 55-2013 reiterating the taxpayers’ obligations in relation to online business transactions, including online retailing through virtual shopping malls, online marketplaces and other online stores. Recently, BIR issued RMC 97-2021 to remind social media influencers—or those earning income in exchange for services performed as bloggers, video bloggers and other content creators—of their tax obligations.

As we embrace the new normal, with almost all transactions being done online, BIR will definitely focus its tax enforcement efforts on all these digital platforms and players who are generating significant revenues, especially during this pandemic. Thus, an annual tax health check is necessary to make sure individuals and companies are fully compliant with all applicable tax laws, rules and regulations, and are aware of existing tax exemptions or reliefs so they can legally avail of these and avoid unnecessary taxes.

Taxation of the digital economy is real and here to stay for good. Aside from staying COVID-free, taxpayers must make sure they are also free from unnecessary taxes, penalties and compromises. INQ

This article reflects the personal opinion of the author and not the official stand of the Management Association of the Philippines or MAP. The author is member of the MAP Ease of Doing Business Committee, founding chair and senior tax advisor of Asian Consulting Group and cochair of Paying Taxes – EODB Task Force. He is trustee of Center for Strategic Reforms of the Philippines.