Taxation of the digital presence | The Manila instances

INNOVATIONS in technology keep arriving in our rapidly changing world. In the past, traders only advertised their goods in local newspapers. Eventually they started showing their products on our local radios. When we thought TV advertising technology was at its peak, we knew we were wrong when product placements were advertised through digital platforms. Truly, the modern world has changed the way we live. Even our food can now be delivered to our home via an online app. We make our way to the office by booking a grave. We watch our favorite shows on Netflix. We hear our favorite songs on Spotify. Technology has created a limitless marketplace for us where everything is within reach with just a tap or click.

Currently, creative Filipino individuals are using this marketplace to generate revenue by uploading content to multiple digital platforms owned by companies based overseas. Like any income the ordinary businessman earns, the income of these Filipino individuals escaped the watchful eye of the Bureau of Internal Revenue (BIR). The tax office has clarified the taxation rules for this online trade in several publications.

The BIR recently issued Revenue Memorandum Circular (RMC) 97-2021. The RMC clears the tax obligations of social media personalities who earn income from uploading sponsored content to social media platforms such as Facebook and YouTube. Among other things, she reaffirmed the requirements for compliance with tax regulations such as registration with the BIR, keeping books and filing tax returns. The RMC also advised the BIR offices to conduct a full tax investigation against social media influencers located in their respective jurisdictions.

RMC 97-2021 is not new in that it aims to capture the taxation of online businesses. With the proliferation of e-commerce, the BIR issued RMC 55-2013 in 2013 as a reminder that people doing business through online transactions are subject to the same registration, invoicing, tax filing and retention requirements as traditional stationary and Mortar shops. In 2015, the BIR reaffirmed the tax treatment of transport network companies (TNCs) such as GrabTaxi, their partners / suppliers and similar agreements. Each TNC and its partners should register their business with the BIR, keep manual ledgers / a computerized bookkeeping system, and issue receipts for sales of services. Like all taxpayers, expenses from TNCs are deductible expenses unless properly documented and the associated taxes are properly withheld and paid to the BIR. Failure to comply with these regulations is punishable under both civil and criminal law according to the tax code. In 2020, the BIR once again reminded us of the tax obligations of people who do business electronically via RMC 60-2020.

At the same time, however, the income of the foreign companies that own the digital platforms used here in our country must be added to the income of these resident Filipino people. While it is clear that the resident Filipino natural persons are subject to Filipino taxes on all income they generate from the digital platforms, it is not clear in our tax laws whether the owners of the digital platforms are also subject to Filipino taxes. Non-Resident Foreign Corporations (NRFCs) are taxed on their income earned in the Philippines. With the widespread technological innovations, NRFCs in the Philippines can generate income but avoid taxation here.

The tax laws enacted in the Philippines recognize physical presence as the main criterion for determining whether taxes are collected. These laws were created when the digital economy was virtually non-existent. Over the years, the modern business landscape has enabled multinational corporations to operate remotely via digital platforms in multiple states. Should digital presence be taken into account when determining what income is taxable in the Philippines? When is the Philippines allowed to tax and tax these on digital services?

There are over 3,000 bilateral double taxation agreements that aim to delimit the taxation rights and obligations of the contracting states. However, these treaties have not yet specifically and categorically stipulated which of the contracting states is responsible for collecting taxes on transactions via digital platforms. With this desire, taxpayers continue to enjoy avoiding taxes on their digital service income through the use of various types of tax planning strategies. As a result, states may generate less tax revenue that could have been used to provide basic resources, education, health services, food, housing, etc. to their citizens.

Developments in international tax law attempting to address this relevant and topical issue include the bottom-line erosion profit-shifting project, or the “BEPS project”. The Organization for Economic Co-operation and Development (OECD) and its member countries are creating a modern international tax framework to ensure that profits are taxed where economic activity and value creation take place. The OECD is looking at 15 BEPS measures that aim, among other things, to address the tax challenges of the digital economy and to identify and address the most important challenges that the digital economy poses for the existing international tax regulations. The BEPS action steps were formulated to limit the maneuvers of large multinational companies to shift profits to tax havens and to avoid taxes in the state where the companies do business and generate profits. This ongoing evolution can pave the way for more effective implementation of taxation in the digital economy.

Although the Philippines is not an OECD member state, Congress recently proposed taxing digital services through House Bill 6765 or the Digital Economy Taxation Act. The bill provides for a 12 percent value added tax on electronically provided services, digital advertising services, subscription-based services and other electronic business transactions. In addition, network orchestrators must withhold taxes on the income generated by their partners.

However, developments in tax law should not stop there. NRFCs are also subject to income tax. A digital presence should be considered to record income subject to income tax. Local digital tax laws should be comprehensive to cover the collection of taxes on foreign companies that carry out significant economic activity in the Philippines through digital platforms. Tax collection mechanisms, e.g. B. Registration, should exist for these types of entities for taxation purposes. More importantly, these local digital tax laws should be globally coherent to avoid the possibility of exploitation in the event that there are gaps between our local tax laws and the tax laws of other states.

There are many fish in the sea, but we may only catch the smaller ones. At this time when our public fund has been used up due to unlimited spending on responding to Covid-19, we need a fishing net to catch any fish we are legally allowed to catch.

Robert Jhon C. Salazar is a Senior Associate in the Tax Services Department of Isla Lipana & Co., the Filipino member firm of the PwC network (an institutional member of ACPAPP). The author’s opinion does not correspond to the opinion of these institutions.