Financial Technology (Fintech) companies combine technology and innovative business models to enable, enhance and disrupt financial services. They are dramatically changing the financial services industry landscape in all parts of the world. Blockchain, cryptocurrencies, app-based alternative finance and open-banking are amongst the biggest disruptive themes introduced by these companies.
With a techie young population willing to spend, the Philippines is becoming a haven for fintech companies in Southeast Asia. In fact, the Bangko Sentral ng Pilipinas (BSP), citing the FINTQ Inclusive Digital Finance Report for 2017-2018, puts the number of fintech companies in the country at 60 with expected transaction values of $5.7 billion this year.
The annual growth rate of fintech transactions in the Philippines is pegged at 16.4% by the same FINTQ report. By 2022, forecasters believe that transactions from this industry can reach the half-trillion-peso mark.
Considering the potential economic impact of the fintech industry, some\ regulators have begun to set standards for this specialized industry.
Since 2014, the BSP has adopted a “test and learn” approach, now referred to as the “regulatory sandbox” approach. Under this approach, the BSP observes actual operations of fintech companies and then drafts appropriate regulations in response.
In June, the BSP established the Financial Technology Sub-Sector (FTSS), a new unit to oversee fintech companies.
The BSP has also issued several regulations for this type of financial organization. For example, Circular No. 944 provides the regulatory framework for entities that use Virtual Currency (VC) as the underlying instrument for remittance.
At the same time, the Securities and Exchange Commission (SEC) has also flexed regulatory muscle in order to protect investors in the fintech landscape while encouraging investments in this new technology. The SEC has recently issued draft rules on Initial Coin Offerings (ICOs). ICOs refer to distributed ledger technology fund-raising operations involving the issuance of tokens in return for cash, cryptocurrency or other assets.
Other regulators, such as the Insurance Commission (IC) and Philippine Deposit Insurance Corporation (PDIC), are closely coordinating with the BSP and SEC to establish a committee that will guide fintech companies.
We should note, however, that while some regulators have issued rules or at least have shaped some regulatory matters pertaining to fintech, stakeholders are still waiting for the Bureau of Internal Revenue (BIR) to issue a revenue regulation or issuance that would provide guidance in connection with the taxation of fintech companies.
There is reason to believe that the BIR has yet to issue a FinTech Tax Regulation because the transactions of these companies are similar to industries such as banks and other financial institutions that have tax regulations applicable to their transactions. Perhaps also the taxing authority may also want to observe first the transactions before coming up with definite regulations, just like the BSP’s “test and learn” or sandbox approach.
In the absence of a revenue issuance that squarely applies to them, fintech companies may, however, assess and analyze their transactions and apply the basic taxation principles and procedures to comply with their tax obligations.
Like any other corporation, fintech companies are subject to regular income tax based on net taxable income at the rate of 30%. Also, considering that the fintech industry in the Philippines is just in its infancy, a Minimum Corporate Income Tax (MCIT) of 2%, in lieu of the regular 30% Regular Income Tax, may be imposed on a new fintech company beginning on the fourth taxable year immediately following the year in which such a fintech corporation commenced its business operations. Withholding taxes on such income may also apply.
Considering that some Philippine fintech companies may register as branches or subsidiaries of foreign fintech companies, they may also be subject to 15% branch profit remittance (BPR) for branch or dividend withholding tax for subsidiaries on their remittance of earnings.
According to the 2017 Fintech Startup Report, the fintech segments with the most players are mobile payments/digital payments and alternative finance. This is not surprising because 86% of households in the Philippines are “unbanked” according to the BSP.
BSP Governor Nestor Espenilla said during an employers’ conference on April 18 that digital payments account for the largest share of the fintech market in the Philippines at 98.9%. Given that bulk of the fintech transactions are digital payments, the tax obligations applicable to companies processing digital payments may also be used as a guide. These digital payment channels usually charge transfer or remittance fees. The transfer fee or remittance may be subject to 12% value added tax (VAT) on services.
For the tax obligations of other online transactions of payment gateways, the BIR issued, on Aug. 5, 2013, Revenue Memorandum Circular (RMC) No. 55-2013, which reiterated the taxpayer’s obligations in relation to online business transactions. The RMC defined payment gateways as “banks or other organizations and third party settlement organizations that have contractual obligations to make payments to participating payees in the settlement of the transactions. These include, but are not limited to, credit card companies, banks, financial institutions, and bill paying services.”
Only the tax obligations of credit card companies and banks as payment gateways were mentioned. The tax obligations of fintech companies were not mentioned because the RMC was issued in 2013, a time when the word “fintech” was not even a buzzword.
Alternative finance is another fintech service with the most number of players. These companies provide alternative modes of granting loans using technology from their own capital funds and from funds sourced from not more than 19 persons.
The income of such companies from their lending activities, including income incidental to their lending business, is subject to 30% income tax or MCIT and to the applicable withholding taxes. Moreover, RMC No. 13-96 provides that lending companies are subject to 12% VAT on their gross income consisting of interest, fees, charges, and incidental receipts derived from the lending of money.
Another emerging fintech segment that has caught much attention is blockchain. Blockchain is the technology that underpins bitcoin and other cryptocurrencies.
The BIR has yet to release clear guidelines on the tax treatment of cryptocurrency transactions and those that utilize blockchain technology.
However, it is clear under the National Internal Revenue Code that all income (such as income from crypto- currency transactions) are subject to tax, unless expressly exempted by law.
While the fintech community eagerly waits for the BIR to finally catch the “fintech bug,” hopes are high that any revenue regulation or issuance that would be issued could provide clear-cut guidelines that truly understand the complicated nature of fintech and that it would give regulatory clarity to all stakeholders.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.
Mark Anthony N. Manuel is a Senior Associate Lawyer at SGV — Financial Services Tax.