With the advancement in transportation, logistics and communications, geographical barriers are no longer a concern in international trade and cross-border transactions even in an archipelagic state like the Philippines. What is probably challenging on the part of the Bureau of Internal Revenue (BIR) is how to efficiently track these international transactions so that correct taxes that are rightfully due to the country are collected accordingly.
In a recent interview with reporters, BIR Commissioner Romeo Lumagui, Jr. said that he is looking to create a separate BIR unit to focus on international tax collection, transfer pricing, base erosion, profit shifting, as well as monitoring of onshore transactions of global e-commerce firms.
I fully agree with the Commissioner.
In the area of e-commerce and digital transaction, feasibility of tax collection is certainly a challenge. In this country, the rise of digital transaction is noticeable but we do not have a clear methodology in place on how to track these transactions and how to efficiently collect the applicable tax that is due to the Philippine government.
As you may be aware, we have a bill currently being minted in Congress to further clarify the taxability of digital transactions, seeking to set a more definitive guidelines on the imposition of VAT on electronic or digital services. The bill defines what is considered digital service and how the fees flowing from such transaction be taxed in our jurisdiction. However, I would say that this is easier said than done due to the difficulty in tracking these transactions.
Note that under the bill, the sale or exchange of services shall include supply of digital services by any person, whether resident or non-resident. Even a non-resident digital service provider is liable for assessing, collecting, and remitting the VAT on the transactions that go through its platform. It is likewise liable to register for VAT if its gross sales/receipts exceeded or there are reasonable grounds to believe that its gross sales/receipts would exceed the VAT exemptions threshold.
So, if digital services are consumed by a buyer in the Philippines either for personal consumption or for trade or business purposes, the fees arising therefrom shall be subject to VAT in the Philippines notwithstanding that such digital services are performed, rendered or created by non-residents and notwithstanding that such services are done outside the Philippines. The only requirements for the imposition of VAT are that the services are rendered through digital or electronic means, and that the digital services are consumed in the Philippines.
Sounds good to the economy. But the question is, how can the BIR efficiently track these transactions? Does it have the capability to do so?
Perhaps, to efficiently implement this proposal, the bill should also include creation of an office or a division of the BIR that will specifically address the peculiarity of digital transactions and appropriate the needed budget therefor.
Tax on digital transaction is still in its early stage in tax practice, at least in this country, where no written rules are yet available in our tax books. Thus, a thorough and a more extensive study on tax administration in this area seems to be necessary, indeed. Hence, a need to set up an office for this purpose.
The office may be established to adopt and promulgate policies and rules for the effective enforcement of the provisions of the digital tax bill. Since the digital world is peculiar and entirely different from the usual business transaction of buying and selling that we know, upon which our present tax laws and administration have been based, expertise in this field may have to be established.
Notably, even in the area of transfer pricing, the BIR seems to have no adequate capability in implementing in full various administrative circulars and regulations that have been issued in this area. Given the current trend in global business where big businesses are present in almost every corner of the world including the Philippines, there may also be a need to set up a separate division of the BIR to specifically handle transfer pricing issues and audit.
The creation of a separate office that will specifically cater to digital transactions and transfer pricing issues will certainly improve BIR tax collections in these areas. Hopefully, the advances in technology would be able to provide our tax administrators a methodology in tracking what is due to our country.
The author is a 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 rodel.unciano@bdblaw.com.ph or call 8403-2001 local 140.