Digital transactions on the rise: Are they taxable? Part 1

Jan Kriezl M. Catipay

(First of two parts)

For many of us, digital transactions have become well-integrated into our daily lives — from online banking, shopping, ordering food to booking flights. This has been especially true during the pandemic, where the convenience of access to basic services and even complex ones like telemedicine within the confines of one’s home, has pretty much become the norm.

With the increase in revenue generated through digital services comes the need to plug in and capture tax leakages arising from these transactions to promote equity and fairness. For instance, the purchase of goods and services, regardless of whether these are from a physical store or online, should be subjected to VAT. However, since there are no existing mechanisms which allow the tax authorities to monitor them nor are there tax rules that detail how online transactions (coursed through various web/mobile-based applications) are subject to VAT, most, if not all, of these digital transactions escape taxation. This gives undue advantage to online sellers and platforms even when the products sold are basically the same.

With the increasing usage of digital transactions in the past decade, the Bureau of Internal Revenue (BIR) tried to keep pace by issuing Revenue Memorandum Circular (RMC) No. 55-2013. The RMC emphasizes that taxpayers engaged in online business transactions (e.g., online selling/retail, intermediary service, advertisement/classified ads, auctions) should be treated akin to traditional or physical business establishments. It reiterated that existing tax laws and regulations on the tax treatment of sales/purchases of goods/services are to be applied equally without distinction on whether the marketing channel is online or through traditional physical locations.

Additionally, with the subsequent increase of on-demand ride-hailing and sharing apps, the BIR then issued RMC No. 70-2015 to reiterate the tax treatment of persons engaged in the business of land transportation, particularly Transport Network Companies (TNC) and their partners and suppliers. The RMC states that if the TNC is a holder of a valid and current Certificate of Public Convenience, it will be treated as a common carrier and subject to 3% Common Carrier’s Tax. Otherwise, it will be classified as a land transportation service contractor and subject to 12% VAT.

The current global pandemic has further spurred the growth of online sellers. In response, the BIR issued RMC No. 60-2020 to remind persons doing business and engaging in digital transactions to ensure the registration of their businesses and pay their correct taxes. This Circular not only covers sellers but also payment gateways, delivery channels, internet service providers, and other facilitators.

With the country’s struggle to continuously finance its efforts to combat COVID-19, the government sought to increase its revenue collection and at the same time, set a statutory clarification on the “VATability” of services rendered electronically.

House Bill No. 7425 was filed on Aug. 18 as a substitute bill for House Bills No. 4531, 6765, 6944, and House Resolution No. 685.

This bill also seeks to clarify the imposition of 12% VAT on the supply by a resident or non-resident seller of electronic devices, the online sale of services that includes online advertisement services and provision for digital advertising space, digital services in exchange for a regular subscription fee, and the supply of other electronic and online services that can be delivered through the internet. The substitute bill aims to level the playing field between traditional and digital businesses by clarifying the imposition of VAT on digital service providers.

The bill proposes to add another section in the Tax Code which requires non-resident Digital Service Providers (DSPs) to collect and remit the VAT in transactions that go through its platform. However, these non-resident DSPs are precluded from claiming any creditable input tax.

The new section defines a DSP as a provider of a digital service (defined as any service that is delivered or subscribed over the internet or other electronic network, which cannot be obtained without the use of information technology and where the delivery of the service may be automated) or goods to a buyer through operating an online platform for the purpose of buying and selling of goods or services or by making transactions for the provision of digital services on behalf of any person.

DSPs may include a third party that acts as a conduit for goods or services offered by a supplier to a buyer and receives commission; a platform provider for the promotion that uses the internet to deliver marketing messages to attract buyers; a host of online auctions conducted through the internet, where the seller sells the product or service to the person who bids the highest price; a supplier of digital services to a buyer in exchange for a regular subscription fee; and a supplier of electronic and online services that can be delivered through the internet.

It also requires non-resident DSPs that engage in the sale or exchange of digital services to register for VAT if the gross sales/receipts for the past year exceeded P3 million or if there are grounds to believe that the gross sales/receipts for the next year will exceed P3 million.

In the second part of this article, we will discuss the following topics: how a VAT-registered non-resident DSP may issue an electronic invoice or receipt to substantiate transactions; the proposed amended VAT exemption on the sale, importation, printing or publication of books, and the state of our digital tax laws compared with neighboring ASEAN countries.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Jan Kriezl M. Catipay is a Tax Senior Director from the Global Compliance Reporting Service Line of SGV & Co.

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