THE NEW ECONOMY: HOW ARE ONLINE BUSINESSES TAXED?
By: Atty. Ellaine Anne Bernardino & Ramon Dy on October 1,2020
The coronavirus disease 2019 (Covid-19) pandemic has caused numerous businesses to close and millions of Filipinos to lose their jobs. It has also led countless Filipinos under quarantine to use the internet to earn a living, resulting in a boom in online businesses. It has also prompted many consumers to shift to online transactions to avoid physical contact.
In response, the Bureau of Internal Revenue (BIR) issued on June 1 Revenue Memorandum Circular (RMC) 60-2020 to guide those conducting business through electronic means to comply with their tax obligations and register with the bureau. This is similar to another memorandum issued seven years ago, RMC 55-2013, which identified the most common online business transactions in the Philippines: online shopping or retailing; online advertisements; online intermediary services, such as the Shopee and Lazada shopping platforms; and online auctions.
Taxing online businesses
The Philippines currently has no special legislation that provides for the taxation of online transactions. However, the imposition of tax under the National Internal Revenue Code (Tax Code) makes no distinction between businesses with a physical presence and those with only a virtual one. Therefore, online transactions should be taxed in the same way as conventional ones. Unless a taxpayer enjoys an exemption, he or she is obliged to pay taxes.
Under Republic Act 10963, or the “Tax Reform for Acceleration and Inclusion Act,” which amended the Tax Code, individual taxpayers earning a taxable annual income not exceeding P250,000 are exempt from paying income tax.
On the other hand, corporations conducting business through digital means are liable to pay the corporate income tax rate of 30 percent of their taxable annual income, regardless of the amount. Only those whose yearly income exceeds P3 million are liable to pay the 12-percent value-added tax (VAT).
The individual owner of an online business who has a taxable annual income exceeding P250,000 and gross receipts not exceeding the P3-million VAT threshold can pay either the flat 8-percent income tax rate in excess of P250,000 or a tax based on graduated income tax rates for individuals. But business owners whose annual income exceeds the VAT threshold have no choice but to pay the latter tax rates.
RA 9178 offers tax exemption, incentives and other benefits to proprietors of a barangay (village) micro business entity (BMBE) operating an online business by registering with their respective local government units. A BMBE is defined as any enterprise that produces, processes or manufactures products, trading and services whose total assets, including those arising from loans but exclusive of the land on which that entity’s office, plant and equipment stand, shall not exceed P3 million.
However, these rules on taxation only apply to transactions that can be taxed by the Philippine government.
In cross-border online transactions, it is important to determine the “situs” or place of taxation to know if tax may be imposed by the government. Under the Tax Code, resident citizens and domestic corporations are taxed on their worldwide income, but nonresident citizens, aliens and foreign corporations are taxed only on their Philippine-sourced income.
Thus, in cross-border transactions, determining whether an income is Philippine-sourced or not is crucial, and may pose a challenge to taxpayers and tax authorities alike. (“Taxing the Digital Economy in the Philippines” by Kristin Charisse C. Siao, Mely Ann Emerie A. Cristobal and Raymond John S. Cheng; Lexology.com; May 21, 2020)
The new economy in the Philippines
Our lawmakers are considering enacting measures on the taxation of the digital economy, also known as the “new economy,” to increase government revenues for the economy’s recovery from the pandemic. (“BIR extends anew deadline for online trade registration to Sept. 30” by Ben O. de Vera; Inquirer.net; Sept. 1, 2020.) The House of Representatives, for one, has proposed House Bill 6765, or the “Digital Economy Taxation Act of 2020,” which proposes to impose VAT on the online transactions of goods and services and requires nonresidents offering digital services in the Philippines to have a resident agent.
The Senate, meanwhile, has filed Resolution 410, which seeks to tax multinational online streaming services and the digital economy.
Congress is yet to pass a law that specifically addresses online transactions and businesses. Such a law must not only correspond to the changes brought by the new economy, but also be efficient with appropriate guidelines to regulate these. Also, because of the challenge in determining which jurisdiction has the right to tax international online transactions, it is important that countries come into an agreement to prevent double taxation.
In this regard, the Organization for Economic Co-operation and Development has made proposals on allocating profit to different countries from where an international company generates revenue or derives value. These proposals should also be considered by our lawmakers and tax authorities.
One of the most important lessons the pandemic has taught us is that the internet has increasingly become an essential tool for business. With the high level of convenience it offers to consumers and growing technological advancements, there is no doubt that the digital economy in the Philippines and overseas will continue to flourish. The rules on the taxation of internet or online transactions must be clear, simple and fair so that taxpayers shall readily choose to abide by them.