On 19 May 2020, House Bill (HB) No. 6765 or the Digital Economy Taxation Act of 2020 (DETA ACT) was filed in Congress, seeking the enactment of a law entitled “an Act Establishing a Fiscal Regime for the Digital Economy
The Covid19 Pandemic affected every Filipinos as the Government placed different regions in various lockdown measures to curb the spread of the virus. It must be noted that the Philippines imposed not just the strictest lockdown restrictions in the Asia-pacific region but the entire world.
However, during this period, several businesses have shifted towards the use of the internet as a means of conducting business. Digital transactions have increased exponentially and “Electronic commerce” thrived. And the trend is that it will continue for several years.
To address the abovementioned challenge the bill was filed in line with the policy of the Government that its tax system shall continue to evolve and in anticipation of new methods of transactions among buyers and sellers of goods and services to preserve the revenue base.
It also complements Revenue Memorandum Circular 055-13 by the Bureau of Internal Revenue which requires registration and payment of taxes of online stores and online intermediaries for their electronic commerce activities.
Network Orchestrator under DETA Act
The bill proposes to increase income tax and value added tax (VAT) compliance by requiring “network orchestrators” and “electronic commerce platforms” to withhold those taxes by appointing them as withholding agents.
Under the Bill, A network orchestrator is defined as “persons, typically aided by information technology, that create a network of accredited service providers and service consumers, and act as intermediaries that facilitate the matching of a consumer’s services needs with a provider’s available service.”
Thus, under the proposed bill, Withholding tax is 5% for individuals if their annual income is less than Php3 Million. The withholding charge is 10% if personal revenue is more than Php3 M a year.
For non-individuals, the withholding tax is 10% if the annual gross income is less than Php720,000.00 and 15% if more than Php720,000 a year.
Electronic Commerce Platform
Moreover, under the same bill, an electronic commerce platform refers to “persons, typically information technology companies that act as intermediaries by connecting sellers and consumers usually through an electronic means of transmission.
Internet-based companies and online service providers already registered in the Philippines are currently imposing 12% VAT.
The Bill will synchronize the tax collection all business conducted by electronic commerce platform will be required to withhold 5%/10%/15% from their merchants and the Bureau of Internal Revenue can use this information to audit those merchants if they actually remit their 12% VAT as well as the compliance with their annual income tax returns.
Digital Advertising Services, Services Rendered electronically and Subscription-based services
Furthermore, the bill seeks to expand the coverage of VAT-taxable transactions supply by any resident or a non-resident person of digital advertising services, subscription-based services, and services that can be delivered through the internet.
In relation thereto, the DETA Act defined the following terms;
- Digital Advertising Services– Online advertisement agencies, any provision for digital advertising space, and other facilities or services for purpose of online advertisement.
- Services rendered electronically – services rendered to a consumer through an electronic means of transmission, typically the internet.
- Subscription-based services – product services rendered electronically in exchange for a regular subscription fee over the usage of the said product or service.
The bill also requires that digital service providers need to have a physical office and be registered before the BIR and SEC. The purpose is to protect consumers against unfair trade practices and faster customer service.
Countries in the Asia Pacific Region have passed similar laws to the said bill. Last January 2020, Malaysia started charging 6% digital tax and Singapore also charges 7% GST on foreign digital companies.
In conclusion, DETA ACT fills in missing the details of the Philippines’ existing e-commerce law regarding the taxation of online services and platforms.
Moreover, it clarifies the application of Value Added Taxes on online transactions of a non-resident foreign corporation that it mandates the same to act through a representative office or agent. And most importantly, DETA Act expands the taxation of establishments covered under BIR RMC 055-13.