By Butch Fernandez & Jovee Marie N. dela Cruz
Lawmakers are pushing for imposing taxes on foreign companies that thrive in the digital economy; revenues that Albay Rep. Joey Sarte Salceda estimates could help the country’s battle against the coronavirus disease 2019 (Covid-19) pandemic.
That is also what Senator Ramon Revilla Jr. believes when filing Resolution 410. Revilla’s resolution enables the Senate Committee on Ways and Means to consider the proposal in aid of crafting remedial legislation that will “authorize tax collections from multinational online streaming services and the digital economy in general.”
In filing the resolution, Revilla noted the Philippines’s shift towards digitalization continues to accelerate amid the imposition of community quarantine measures brought about by the coronavirus disease 2019 (Covid-19). He added that the rapid growth of the digital economy is an opportunity for government to increase its income, which can be “used for providing services for all Filipinos affected by the pandemic.”
Revilla said that the establishment of a digital taxation framework is among the strategies recommended by the Inter-Agency Task Force Technical Working Group for Anticipatory and Forward Planning.
“We need to embrace the digital revolution of our time, and to comprehensively review and update our existing tax laws regarding digital economy,” the solon said.
Revilla recalled that even before the Covid-19 pandemic, the Philippine digital economy was already expected to grow by more than 250 percent from $7 billion to $25 billion by 2025. These figures, the lawmaker said, represent 5.3 percent of the country’s gross domestic product.
Network orchestrators
AT the Lower House, Salceda filed House Bill (HB) 6765 or the Digital Economy Taxation Act of 2020.
He explained that HB 6765 estimates annual incremental revenues of as much as P29.1 billion from 12-percent value-added tax (VAT), 35- percent corporate income tax and 5-percent digital service tax that will be imposed on the digital economy.
Of the total estimated yield, P1.20 billion will come from improvement of the tax compliance with “network orchestrators” as withholding agents; P4 billion from digital advertising; P2.9 billion from other digital services such as games and other digital media and P2.2 billion from subscription-based services VAT.
Subscription-based services include music streaming such as Spotify, video streaming such as Netflix and electronic publishing such as e-books, the bill read.
Also, P3.5 billion will come from “network orchestrators” as withholding agents for VAT, P9.7 billion from e-commerce platforms as withholding agents for VAT and P5.7 billion from the corporate income from digital services.
The bill defines “network orchestrators” as persons, typically aided by information technology, who act as a network of accredited service providers and service consumers and as intermediaries that facilitate the matching of a consumer’s service needs with a provider’s available services.
SocMed users
Salceda clarified that his tax proposal will not affect social media users who do not advertise on these platforms.
“No new taxes here, we just want them to pay their fair share,” the lawmaker explained.
“Assuming you’re a company that sets up in the Philippines and you do video-streaming or music-streaming services, you will definitely pay taxes; but companies [operating] Netflix and Spotify don’t. That’s obviously not fair,” Salceda added.
“When you’re a network in the Philippines, advertising services paid to you will be subject to VAT; but Google and Facebook are not subject to VAT for advertising,” he further explained. Salceda said these companies earn so much from Filipinos but doesn’t pay a single centavo as VAT.
“Internet marketplaces like Lazada and Shopee are growing very
rapidly due to Covid-19, but there may be issues of tax compliance among its partners, too,” he added. “And we are not able to capture that because our current definitions do not include them as withholding agents.”
Google, Facebook
The bill seeks to amend the National Internal Revenue Code of 1997, as amended.
“Simply put, these are not new taxes. These are tax administration measures that we hope will capture the value more fairly,” Salceda explained. “Especially when local businesses are struggling due to Covid-19, and there are these companies that are making a killing because of isolation, but are not paying enough taxes.”
The bill makes “network orchestrators” like Grab, Angkas and other similar services withholding agents for income taxes, to ease their partners of the burden of having to pay their own taxes, while also encouraging tax compliance.
It clarifies that services rendered electronically in the course of trade or business are liable to VAT.
The bill also clarifies that digital advertising by internet giants such as Google and Facebook and subscription-based services such as those of Netflix and Spotify, are subject to VAT.
The measure also makes network orchestrators for leased services like AirBnB and electronic commerce platforms such as Lazada and Shopee as withholding agents for VAT.
It also requires those who render digital services to do so through a resident agent or a representative office in the Philippines, to address the issue of companies having significant presence in the country without having a physical establishment in the Philippines not being liable for tax and regulatory purposes.
Not affected
According to Salceda, digital taxation is imposed in India and Indonesia and “these companies are still doing well.”
“If you are just a regular user, you will not be affected [by this taxation]. If anything, these social media platforms need you, the user, to keep using, so that they could earn from digital advertising, the same way TV networks need viewers so they could get advertising contracts,” Salceda said. “So, the usual social media channels will definitely remain free. The whole idea that somehow, this bill will make social media networks charge users who don’t advertise, that’s a bad reading of the proposal.”
Revilla also noted that technologically-advanced countries such as Norway, Australia, Japan, France, South Korea, United Kingdom, Singapore and Malaysia have already adopted and passed their respective versions of a digital service tax law. The law enables their respective governments to collect taxes from local consumption and use of digital content and services from foreign providers, according to Revilla.
According to Revilla, Filipinos are recognized as “voracious online users.”
They typically spend around 10 hours and two minutes of their time on the Internet, exceeding the global average online time of six hours and 42 minutes daily, Revilla said.
He added that Filipinos spend around four hours and 12 minutes on various social media platforms every day, nearly double the global daily average of two hours and 16 minutes. Filipinos spend at least 3.3 hours daily watching online content on mobile devices, Revilla said.
‘New Normal’
Revilla suggests that revenues raised from taxing the digital economy be used to finance the national economic recovery plan, especially the rehabilitation of industries severely affected by measures to stem the Covid-19 pandemic. He also suggests the revenue could be used to build “Schools for the Future,” which would be equipped with digital technologies and laboratories.
As we continue to implement quarantine measures like social distancing and prohibiting mass gatherings; and us we enter what we call the “New Normal,” it’s expected that more and more citizens would use technology-based services like online streaming at online market, Revilla said in Filipino.
He also noted that while local online businesses have already been covered by “our taxation laws, multinational corporations with more sophisticated technological capabilities, less physical presence yet wider reach may have to be properly taxed given the outdated provisions and leakages in our tax measures.”
The Bureau of Internal Revenue (BIR), he said, issued Revenue Memorandum Circular 55-2013 reminding the taxpayers’ obligations in relation to online business transactions including online shopping or online retailing, online intermediary service, online advertisement/classified ads, and online auction.
Revilla also cited multilateral efforts at unifying tax rules regarding digital economy, such as the one led by the Organization for Economic Co-operation and Development, to address overlaps with individual state measures and avoid double taxation, considering the borderless nature of such transactions.
New sources
Salceda said his proposal stems from the economic managers’ opinion that government needs “to find new revenue sources every time we propose new spending.”
Aside from HB 6765, Salceda has also filed a POGO tax proposal and a road users’ tax proposal that, he said, “will not erode economic growth and will not tax the poor at all.”
He said these proposals estimate a yield of around P65 billion to P70 billion a year if the BIR and the other collection agencies “could make good with collection efficiency.”
“This is about another P30 billion. The House Ways and Means Committee is already solving a P100-billion share of the problem of revenues,” Salceda said.
Image credits: AP
