Pandemic, Technology and Taxes

Philippine Bar Association - Articles - Pandemic, Technology and Taxes

by: Eric R. Recalde*

The pandemic has forced businessmen and entrepreneurs to find innovative ways on how to do business and make a living. Technology has come to fore forcing governments and tax authorities to revisit and adjust their rules and means to enforce existing tax laws. At the international front, OECD countries have reached an understanding on “tax on techs”. In the local scene, the BIR has released clarificatory issuances setting out existing laws and their application on technology driven activities. All these developments now prompt us to understand the underlying policy considerations and their legal ramifications.

In the international front, there is a battle of rights between “residence” versus “source” jurisdictions. Countries that espouse the “residence” concept recognize the need of big businesses to expand. They understand that businesses will only develop if their home country will spare them from the tax burdens arising from their overseas revenues. If residence countries do not adjust, expansion and globalization will suffer. Highly developed countries, in the end, may not benefit from the over capacity of their local industries. Countries that espouse the “source” concept, on the other hand, compete for investments. However, there is a need for their regulation and to impose tax to raise revenues and partly finance the costs of regulation. Some academics argue that these considerations prompt countries to behave in a certain way and agree to legislations if necessary in order to promote an international order in taxation.

The Philippines is generally a “source” country. It seeks to attract needed investments and has crafted special rules to accommodate such investments. CREATE has adjusted the tax rules, making the country’s incentives regime to be “performance-based, targeted, time-bound, and transparent” aligned with international best practices. Unfortunately, it has not addressed the tax on techs. Existing laws provide that Philippine residents must withhold tax if such payments are considered earned in the Philippines. What is considered locally earned remains unclear. Case law is limited to traditional brick-and-mortar methods of doing business and has yet to tackle digital transactions. Doing business cases are different from permanent establishment or tax residence cases. The so-called offline international carriers may fall under the latter but not under the former. Tax situs is also different from tax residence. A foreign person may have a Philippine-sourced income but such person may not be considered to be a Philippine resident or a person doing business in the Philippines. In a country heavily influenced by civil law system, the application of case law may lead to unfair results. The enactment of special legislation is in order.

The challenge in the local scene is different. The law is in place. It is a question of enforcement. The BIR’s desire to enforce and collect taxes, especially from online traders, vloggers and even from sex workers and online gamers, are naturally met with criticism. There is accusation that small taxpayers making both ends meet in the midst of pandemic are prejudiced. There is no question that income and business are subject to tax and the taxpayer must declare and pay following the so-called self-assessment system. Where a tax must be collected at source, the person making the payment must withhold such tax. Congress introduced legislations aimed to make the system fair. It now accommodates small taxpayers. There are simplified taxation and OSD schemes, coupled with reduced tax rates, expanded exemptions, and overhauled withholding and reporting systems. However, questions remain. What is income? What is business? When should there be a self-assessment? What if the activity is isolated? All these are questions of competence, credibility, courage, consistency and fairness. Revenue enforcers must address them.

There is a pending legislation seeking to impose a tax on techs. It may partly address the above concerns. House Bill 6765 aims to clarify that electronic services, digital advertising services, and subscription-based services should be subject to Philippine tax. Digital advertising services “refer to online advertisement services, any provision for digital advertising space, any other facility or service for the purpose of online advertisement.” Following the so-called sliding scale test, online platforms may fall under this category when they are minimally interactive and accessible to local users. They do not meet the test when they do not perform activities that purposely target local consumers. They are mere passive websites that “make information available to viewers but do not permit an exchange of information.”

The Bill also proposes to make network orchestrators, i.e., those online intermediaries that match the requirements of the service consumers with accredited providers’ available services, as withholding agents. They have active participation when there is creation of a new account in the platform and permits the funding of an online wallet to support the sales, payment of the sale of online content and services, and delivery of the online content and services. The same is true even if orders cannot be placed online, but they provide a mechanism for users to contact the service provider. Under the Bill, they will be tasked to withhold and remit the applicable tax due on income of their service providers. If enacted, BIR issuances on online business, such as RMC 55-2013, should be revisited.

Finally, the Bill proposes to mandate those who render digital services to register a Philippine office. This addresses the tax and regulatory compliance of businesses having significant local presence without having a physical establishment in the Philippines.

The proposed Bill may not be passed in its current shape and form. It may undergo revisions and refinements, considering the concerns of various stakeholders. Until its passage, BIR in the meantime must strike some balance in its enforcement of existing tax rules given such rules are susceptible to various interpretations. Lawyers, in turn, must be vigilant in protecting the rights of taxpayers. They must be prepared to address nuances of tax laws as applied to specific circumstances. As the saying goes: no one size fits all. This saying equally applies to taxation on technology in the midst of pandemic.

*Mr. Recalde is a member of the PBA. He is a Partner of ACCRALAW and is currently heads ACCRALAW’s Tax Department. The views expressed in this article are his and for general informational and educational purposes only and not offered as, and does not constitute, legal advice or legal opinion.