[Ask the Tax Whiz] How does the Philippines tax the digital economy?

Mon Abrea

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[Ask the Tax Whiz] How does the Philippines tax the digital economy?
The Philippine Tax Whiz discusses the pertinent information related to the digital economy in the Philippines, covering tax regulations, proposed bills, as well as considerations from the OECD
The digital economy in the Philippines has been booming for the past few years. Are there any existing tax issuances that mandate digital transactions?

According to the OECD, the digital economy covers any economic activities that depend or benefit from digital elements such as technology, infrastructure, services, and data.

Under the Tax Code, transactions made within the Philippines are subject to income tax and value added tax, unless there is an exemption. This includes digital transactions. As required under Revenue Memorandum Circular (RMC) No. 55-2013, taxpayers who are engaged in online transactions and their various forms must register with the BIR, correctly withhold and submit taxes, and fulfill the necessary tax filings.

Moreover, Revenue Regulations (RR) No. 8-2022 provides the guidelines for the issuance of electronic receipts or sales or commercial invoices in lieu of manual receipts or sales or commercial invoices and electronic reporting to the Bureau of Internal Revenue (BIR). This requirement also includes those engaged in e-commerce businesses.

I have heard that the Philippine government is currently planning on taxing digital transactions. How is that supposed to be implemented?

One of the proposals is to impose a tax on online sellers by requiring domestic e-marketplace operators to withhold a tax of 1% on ½ of gross remittances to online merchants for the goods or services sold through their platform.

Under this proposal, there will be an exemption for individuals with an annual total gross remittance not exceeding P250,000 for the previous taxable year.

Another pending proposal is the imposition of a 12% value-added tax (VAT) on digital transactions, and applies to digital service providers through online platforms such as House Bill No. 4122 and Senate Bill No. 250.

The bill imposing taxing VAT on digital transactions is pending in Congress. What are the possible impacts of the passage of this bill? 

Per the Department of Finance, the proposed 12% VAT on digital transactions is estimated to generate P96.72 billion over the next five years. This assumes a 50% tp 70% collection efficiency between 2024 to 2028. A more conservative projection expects P72.69 billion at 50% efficiency. With full efficiency, it could potentially collect up to P145.37 billion from 2024 to 2028, covering digital media and various advertising formats. Adherence to international standards is crucial for long-term benefits. Implementing this bill would significantly impact tax collection in the digital economy, an area currently beyond the scope of the Philippine tax system, resulting in substantial uncollected revenues. This underscores the government’s commitment to extending taxation to the digital sector, recognizing VAT as the primary revenue source.

The Philippines joined as a member of the OECD/G20 Inclusive Framework on Base-Erosion and Profit Shifting (BEPS). What is the significance of joining this framework? Will it address taxing digital transactions?

    As the Philippines joins the OECD/G20 inclusive framework as of November 2023, it reflects its commitment to implementing the BEPS Action Plan and participating in the Two-Pillar Solution addressing Digital Tax Challenges. This decision aligns with the government’s dedication to upholding tax fairness, protecting the national tax base against aggressive avoidance tactics, and promoting cooperation in global tax affairs. With the country’s digital growth, it is crucial to establish effective regulations ensuring fair tax distribution, particularly given the significant presence of tech giant companies.

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