How are online merchants and intermediaries taxed?

Innovations brought about by information and communication technology have dramatically changed how people behave and go about their daily tasks. As the number of computer-literate, digital individuals increases, the easier it becomes to exchange information and facilitate remote transactions.
Conducting business has also become more convenient. Responding to clients’ inquiries and delivering goods and services are now more efficient for both buyers and sellers. Thanks to the continuous development of innovative, disruptive e-commerce technology, the Internet has transformed into an infinite marketplace where everything and anything can be bought and sold.
In the Philippines, a joint report by Globe Telecom and online news portal Rappler revealed that the penetration rate of mobile Internet is growing at 150% every year, with average users spending 3.2 hours on mobile Internet, and 5.2 hours on desktops and tablets.
The same report noted that five out of 10 Filipinos recently bought something from the Internet, including games, music, apps, services, and physical goods.
Like-minded entrepreneurs have welcomed this digital phenomenon with open arms, judging from the popularity of e-commerce websites such as Lazada, Zalora, and Shoppee, which have millions of pesos in sales.
Since these are new business platforms that were not even present a few decades ago, the Bureau of Internal Revenue (BIR) has seen fit to remind the transacting parties of their tax obligations while keeping in mind the shared interests of the government, that is, to ensure the proper collection of taxes from profits gained in the conduct of online business transactions. These policies are intended to complement the Electronic Commerce Act of 2000, otherwise known as Republic Act 8792.
On Aug. 5, 2013, the BIR issued Revenue Memorandum Circular No. 055-13, which further reiterated the taxpayers’ obligations in relation to online business transactions. The regulation enumerated the responsibilities of online merchant and online intermediaries on tax compliance, to ensure that proper taxes are remitted to the government and all the transactions using the internet are properly receipted.
The regulation views an “online merchant” as an e-commerce business owner that owns a website and sells his own products and services, appearing like a virtual store. Likewise, it also defined “online intermediaries” as third parties that offer intermediation services between two trading parties. The intermediary acts as a conduit for goods or services offered by a supplier to a consumer, for which it receives commission.
For online merchants, the tax obligation is straightforward. Online merchants are basically covered by existing tax regulations, as an entity directly selling goods or services. Specifically, online merchants are required to: register the business at the Revenue District Office (RDO); secure Authority to Print invoices/receipts, which may either be manual or computerized accounting system; issue registered invoices/receipts for every sales transaction; withhold required creditable withholding tax (CWT)/expanded withholding tax (EWT) and remit tax to the BIR; file applicable tax returns or other reports required for compliance and pay correct taxes; and keep books of account as required by law, making them available anytime for inspection and verification by the BIR for compliance with tax rules.
However, complications arise when the online platform provider is not the actual merchant. RMC 055-13 foresaw this, and stipulated no exceptions for filing tax for e-commerce platforms, even if online intermediaries are given different requirements. Their tax responsibilities may differ as to whether they actually act as an agent of the merchant, or are considered the merchant itself.
The instances when the online intermediary is considered the actual merchant itself are:

1) When consumers buy goods or services from an intermediary service provider who controls such collection of buyers’ payments, and thereafter receives commission from the merchant/retailer, and;

2) When the intermediary markets multiple products for its own account.

According to RMC 055-13, an Online Intermediary which acts as an agent of the merchant is obligated to:

a. Issue the merchant’s acknowledgement receipt (for goods)/official receipt [OR] (for services) for the buyer to claim the goods/service (in this case, the merchant acting as the principal shall assign a number of pads of such receipts to the intermediary/agent);

b. Ensure the merchant delivers the goods to the buyer with an accompanying invoice or merchant performs the purchased service, and;

c. Issue an OR to the merchant for the full amount of the agreed commission, and reflecting therein the amount withheld by the merchant.

However, if the Online Intermediary controls the collections/payments of buyers or markets products/services for its own account, and is therefore considered the retailer/merchant for the purpose of taxation, it is required to:

a. Issue the invoice/OR for the full amount of the sale to the buyer — if paid through a bank, or issue electronically the invoice/OR for the full amount of the sale to the buyer -if paid by credit card;

b. Issue the acknowledgment receipt to the bank (or through the credit card company) for the amount received;

c. Remit the amount to the merchant retailer net of intermediary’s agreed mark-up/commission (include in the said remittance to merchant/retailer the 10% EWT) — if paid through a bank, or pay the commission of the credit card company net of the 10% EWT and remit the balance to the merchant retailer net of intermediary’s agreed mark-up/commission — if paid by credit card.

Note that this regulation explicitly subjects the income payments made to online intermediaries to 10% EWT. Interestingly, it effectively amends RR 2-98, by specifying the applicable EWT rate for commissions or service fees paid to online intermediaries.
Without this regulation, the income payments to online intermediaries may be subjected to 2% EWT which is the rate imposed on contractors engaged in other computer-related activities under RR 2-98.
Given the above requirements of RMC 055-13, entities offering intermediary services, and those partnering with them, should always take into consideration the proper classification of online intermediaries for taxation purposes in order to comply with the tax rules.
Both RA 8792 and RMC 055-13 were considered ahead of their time when they were enacted/issued. However, in the last five years, the e-commerce community has attracted even more budding entrepreneurs to the market, and virtual shopping is still evolving. As technological innovations continue, let us remain hopeful that taxing authorities will remain on top with timely and updated revenue regulations.
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.
 
Mailyn P. Consignado is a Senior Associate at SGV — Financial Services Tax.