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By: Atty. Euney Marie Mata-Perez on June 25,2020

The coronavirus disease 2019 (Covid-19) pandemic has spurred the growth of digital and online transactions, and this highlighted the taxation issues about them.

In May, we saw the filing of House Bill 6765, or the “Digital Economy Act of 2020.” Sponsored by Albay Rep. José María Clemente “Joey” Salceda, the bill seeks to amend certain provisions in our National Internal Revenue Code, or the “Tax Code.” Specifically, it seeks to subject to the 12-percent value-added tax digital advertising services, such as those on search engines and social media platforms; subscription-based services, including music and video streaming subscriptions; services rendered electronically; and transactions made on electronic commerce (e-commerce) platforms.

HB 6765 also requires suppliers of digital services, network orchestrators and e-commerce platforms to establish a resident agent or representative office to act as their withholding agent in the Philippines. If passed, the measure is projected to generate approximately P29 billion in additional revenues for the government. Thus, it seems to be a very attractive proposal for the government.

However, the government, specifically Congress, should carefully evaluate the proposals under HB 6765, because there are many complexities in taxing digital transactions.

A country cannot just tax any transaction or income. For a transaction or income to be taxed, there has to be a “nexus” (connection) with the state or a tax presence that would give the former the right to tax the transaction or the income derived from it.

Under our tax rules, a nexus arises because of various factors, such as the status of the taxpayer (citizens and domestic corporation), its residence, and source of income or territoriality.

Nonresidents, be it an individual or corporation, are generally not subject to Philippine income tax, unless they derive income from Philippine sources (i.e., they derive some economic benefit from transactions in the country.) In other words, they are taxed only on Philippine-sourced income.

Our Tax Code prescribes that income from sales transactions are deemed Philippine-sourced if the sale takes place in the country. Income from services are deemed Philippine-sourced if the services are rendered here. In the landmark 1987 case of Commissioner of Internal Revenue v. British Overseas Airways Corporation (G.R. L-65773-74), our Supreme Court ruled that the source of an income is the property, activity or service that produced the income. For the income source to be considered from the Philippines, it is sufficient that the income is derived from an activity within the country.

If the recipient of the income has no business presence (in the form of a corporation or agent) in the Philippines or is a nonresident, the Tax Code generally requires the Philippine payor to withhold the tax on the income. This is because the government has no way of collecting the tax from a nonresident who is not a registered taxpayer here.

However, it is challenging to tax or withhold tax on payments for digital or online transactions, especially if they are undertaken with foreign corporations with no business presence in the Philippines. In many of these transactions, the payors are the ultimate consumers who may have no ability to withhold the appropriate taxes and remit them to the government. Thus, the income from such transactions could escape taxation.

Another issue is, of course, determining if the income from digital transactions is rightfully Philippine-sourced or not. For instance, if one buys an item on US-based Amazon and pays with a credit card, would the sale be considered made within the Philippines (and thus, Amazon would be deemed to have derived income from the country, which should be subject to Philippine tax) or offshore (for which the Philippine government has no right to tax)?

Also, the right of the Philippines to tax any Philippine-sourced income may be subject to exemptions or privileges under applicable income tax treaties, which adopt internationally accepted tax rules. Income tax treaties also set out rules to prevent double taxation.

It has thus been recognized that there is a need for countries to agree on how to tax digital transactions in a common manner, and not just unilaterally impose measures to tax them. Without such an agreement, there is a great possibility of double taxation or an improper allocation of taxable profits, i.e., one jurisdiction having the ability to tax an income that should have rightfully been taxed in the source state.

For this reason, the Organization for Economic Cooperation and Development (OECD) recognized the need to establish internationally accepted rules or norms on the allocation of taxing rights between jurisdictions (the “nexus” rules) and the determination of the relevant share of a multinational company’s profits that should be subject to tax in a given jurisdiction (the “profit allocation” rules). Specific proposals have been put forth in this regard, under the so-called Pillars I and II.

There is no doubt that, by requiring suppliers of digital services, network orchestrators and e-commerce platforms to establish a resident agent or representative office that shall become their local withholding agent, HB 6765 seeks to increase or improve the government’s ability to tax and collect the tax on income generated by nonresidents from digital transactions.

However, this may also mean that additional burdens are imposed on these platforms, which may make it unattractive for them to operate in the Philippines and which may run contrary to agreed international norms that the OECD is seeking to establish. Thus, the government should carefully review and study the proposals under HB 6765.

Contact Information

Our office address:

15/f Unit A. ACT Tower, H.V. Dela Costa St.
Salcedo Village, Makati City 1227 Philippines

Telefax: +632 831-1297

Telephone: +632 808-5375 • +632 815-0069



Euney Marie J. Mata-Perez

Mark Anthony P. Tamayo

Gerardo Maximo V. Francisco