Taxation of the digital economy


The Bureau of Internal Revenue (BIR) has conducted tax deficit assessments on income paid by local businesses and agencies to non-resident foreign corporations (NRFCs), especially tech giants like Amazon, Google, and Facebook (or Meta). The deficiency tax assessments include the final withholding tax on income payments made online, for example Facebook ads, plus a 25 percent surcharge, 12 percent interest, and penalties of compromise.

Generally, income paid to the NFRCs is subject to a final withholding tax of 25% and a final withholding on value added (VAT) of 12%. Unfortunately, as a withholding agent, the local business or agency is responsible for withholding taxes. Otherwise, the BIR will run after them, and not after the NRFCs, for failure to withhold tax.

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 treaties. This can be a problem because treaty preferential rates and exemptions from final withholding taxes may not be available.

The tax ordinance n ° 14-2021 defines the guidelines and the procedures aiming to rationalize the use of the advantages of the tax treaty. This applies to NRFCs that regularly transact with the Philippines as long as they use the entity registered in the United States or in countries that have a tax treaty with the Philippines such as Google.

Taxes on digital services

The digital economy has grown dramatically over the years. In the Philippines, it has exponentially increased revenue from overseas, especially for content creators, streamers, and online gamers.

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

European countries like Austria, France, Italy, Spain, Turkey and the UK have implemented a digital services tax (DST). Other countries like Belgium and the Czech Republic have published proposals to adopt the DST, and Norway has officially signaled its intention to implement such a tax.

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

However, the DST is considered a simple temporary tax measure until an agreement is reached within the Organization for Economic Co-operation and Development (OECD).

OECD pillar 1

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

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

Pillar 1 will replace DST and other taxes imposed by other countries on digital businesses. This is more beneficial for countries like the Philippines, as the focus changes on where the profits are taxed.

Taxation of the digital economy

Notwithstanding the pillar 1 proposed by the OECD, a bill on the taxation of the digital economy (House Bill No. 6765) is pending in the House of Representatives. The main features include:

  • Network orchestrators such as ridesharing companies (eg Grab, Angkas), rental platforms (eg Airbnb, Agoda, Booking.com) must act as withholding agents;
  • Imposition of 12% VAT on digital or electronic goods and services rendered electronically; and,
  • Imposition of 12% VAT on digital advertising services (eg Google and Facebook ads), subscription services (eg Netflix, Spotify) and all online services;
  • It will also require tech giants to register a local business with a resident agent where income from the Philippines will be reported and subject to corporate tax.

Annual tax report

Whether the Philippines adopts HB 6765 or adopts Pillar 1 proposed by the OECD, natural and legal persons, nationals or NRFCs, must fully comply with existing tax rules and regulations to avoid heavy penalties and compromises. .

As early as 2013, the BIR had already published the fiscal circular n ° 55-2013 reiterating the obligations of taxpayers regarding online commercial transactions, including online retailing through virtual shopping malls, online marketplaces and online shopping. ‘other online stores. Recently, the BIR released RMC 97-2021 to remind social media influencers – or those who earn income in exchange for services rendered as bloggers, video bloggers, and other content creators – of their tax obligations.

As we embrace the new normal, with almost all transactions done online, the BIR will certainly focus its law enforcement efforts on all of those big revenue-generating platforms and digital players, especially during this pandemic. Thus, an annual tax health check is necessary to ensure that individuals and businesses are in full compliance with all applicable tax laws, rules and regulations, and are aware of existing tax exemptions or reliefs so that they can enjoy it legally and avoid unnecessary taxes.

The taxation of the digital economy is real and there for good. In addition to staying COVID-free, taxpayers must ensure that they are also free from taxes, penalties and unnecessary compromises. INQ

This article reflects the personal opinion of the author and not the official position of the Management Association of the Philippines or MAP. The author is a member of the MAP Ease of Doing Business Committee, Founding Chairman and Senior Tax Advisor of Asian Consulting Group, and Co-Chairman of Paying Taxes – EODB Task Force. He is a director of the Center for Strategic Reforms in the Philippines.

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