The new normal makes us all realize that the digital economy is slowly becoming the new economy. This realization has its pros and cons depending on who you ask. The government now discovers that it can generate incredible revenue streams from this untapped parallel universe, especially now that amid the pandemic, the digital economy is thriving. But on the part of start-ups, it may be the end of an era of hide and seek with the tax man.
Just recently, Congressman Joey Salceda, introduced House Bill 6765, otherwise known as the “Digital Economy Taxation Act.” The HB recognizes digital economy as a rising component of overall commerce in the country and it proposes ways to better capture the value created into the tax system.
It imposes a mix of direct and indirect taxes on transactions made through electronic platforms. It mandates “network orchestrators” like Grab, Angkas, Lazada, foodpanda, to name a few, to withhold tax from the income of the drivers of the Grab car and Angkas, withhold tax from the income of the restaurant where the food has been ordered through foodpanda, withhold tax from the income of the supplier of goods that sells through Lazada.
It also proposes that value-added tax must be imposed on sale of services by any local or foreign entity that is engaged in digital advertising services. VAT must also be imposed on companies engaged in subscription-based services, like Netflix. Unfortunately, we all know that VAT will be passed on and is ultimately shouldered by the end-consumer. It means that you and me who are Netflix subscribers will ultimately pay the VAT.
Under Congressman Salceda’s bill, a foreign company is allowed to do business in the Philippines as a network orchestrator and/or as an electronic commerce platform exclusively through a representative office or an agent which shall be a resident corporation. In other words, these foreign digital companies must create a company in the Philippines first before they can operate in the country. This aims to simplify the efforts of the tax authorities as to which entity to tax for income generated within the Philippines. But it is not a secret that the Internet world knows no boundaries. This requirement of prior registration might limit rather than expand the country’s tax revenue base.
Although the HB covers most transactions conducted through electronic platforms, it has left out a crucial revenue stream, that is, the selling or sharing of compiled user-data. Other countries have molded their digital economy taxation laws to include the trading of user data. In a country of more than 100 million individuals with a known proclivity to actively engage in social media, the Philippines is a gold mine of user data which may be monetized.
In crafting our own digital tax law, it may be wise to learn how other countries do it. Unfortunately, there is currently no consensus among nations as to how to uniformly apply digital tax. There are contentious cross-border tax issues. For example, Facebook’s headquarters is in the United States. But it has subscribers in the Philippines, and it runs a wide array of local and international advertisements in this platform. How much must the Philippines’s share be in the tax pie vis a vis the United States? Of course, both countries will argue that they deserve the greater share.
With the aim of having a unified system, the Organisation for Economic Co-operation and Development released a new work program specifically addressing the tax challenges of digitalization. It proposes Pillar 1 which basically says that businesses must pay more taxes where their consumers are located. As of now, multinational corporations usually pay more tax where production is located rather than where sales are consummated. Since there is still no international consensus as to this OECD proposal, it remains to be a recommendation for countries to apply on their own.
In Europe, a digital service tax is imposed. It is a kind of tax on selected gross revenue streams of large digital companies. On April 1, 2020, the United Kingdom on the other hand, introduced a 2 percent DST on revenues from search engines, social media platforms, and online marketplaces. The revenue thresholds are set at GBP 500 million ($638 million) globally and GBP 25 million ($32 million) domestically. The first GBP 25 million in revenues would be exempt.
In these measures, only companies that reach a certain revenue threshold will be taxed. Start-ups, small and medium enterprise sellers are spared from DST. These countries want to allow individual digital innovations and creativity to grow without being hampered by tax burdens. I hope our lawmakers will see the wisdom behind this policy and impose tax on start-ups only when they have already reached a certain revenue threshold.
The House Bill on digital tax is a welcome development. Hopefully, our policy-makers will find a way to strike a balance by imposing tax on large digital companies only and allow small digital companies to grow with minimal or no tax.
Like the “industrial revolution,” where machines have catapulted humanity to where it is now, we should support the growth of this “digital revolution” not only because it will lift our future to new heights but also out of necessity. Digital is and will be our new way of life.
The author is a senior partner of Du-Baladad and Associates Law Offices (BDB Law), a member-firm of WTS Global.
The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at email@example.com or call 8403-2001 local 330.