Taxwise Or Otherwise

“You have to have a dream, whether big or small. Then plan, focus, work hard and be very determined to achieve your goals” — Henry Sy, Sr.
It’s no secret that a great number of Filipinos want to establish a business to augment their income from regular employment. For some, it is the key to a financially stable retirement. Yet, many would-be capitalists do not dive into the pool unless they have established the necessities — a solid business concept coupled with seamless funding.
Formulating a business concept is often difficult, but most of the successful ones built their companies based on the things they love, or through activities they are passionate about. Once the details of the concept have been finalized, the next step is to look for funding, which is not that easy to come by, especially if you are a budding entrepreneur with no substantial personal or real property that you can use as collateral for a loan. Without funding, the concept will definitely die a natural death.
So, if a group of foreigners offers to finance your concept under an agreement to share with them 50% of the profits and losses, you may agree without thinking twice (or without even thinking), not really bothered by the legal implications of such an arrangement. For the uninformed proprietor, it may be worthwhile to revisit the latest developments on the matter, especially in the digital age where business transactions now take place freely and quickly across borders.
In a request for clarification, a software development company sought guidance from the Securities and Exchange Commission (SEC) on whether the “marketplace” feature of its online platform could be construed as engaging in the business of advertising and/or mass media, and thus, subject to nationality restrictions under existing laws. The platform connects individual debtors to partner-creditors, with the intention of the former obtaining loans from the latter.
As represented, the platform consists of a page where the partners’ logos are displayed and featured, as well as the services they provide.
The SEC unfortunately did not categorically rule on the matter, as online platform content can be variable and mutable; instead, it deemed prudent to provide guidance on the issue. In an opinion issued on Nov. 28, the SEC differentiated between advertising and mass media services. Advertising agencies serve as agents or counsellors of advertisers by writing, preparing, or producing the commercial messages or materials in selling goods or services, and selecting or recommending the medium to be used for dissemination to the public. They do not actually disseminate the materials they prepare. However, if the advertising agency by itself disseminates such materials to the public using any medium of communication, they automatically become mass media.
On the other hand, an entity is deemed engaged in mass media if it disseminates information to the general public, and such information is designed to affect or influence the people’s way of thinking or lifestyle. Currently, mass media includes print, broadcast, and electronic/digital media, which includes the Internet.
Thus, an online or mobile app platform operator (which renders service to third-party clients) is not deemed to be engaged in advertising services if it does not write or prepare commercial messages or materials for the products of their third-party clients to be posted in their platform or mobile app; and does not select for or advise their third-party clients what medium or vehicle to use to disseminate the advertising materials and commercial messages.
On the other hand, the same operator is not engaged in mass media activities under the following conditions:

1. There is no pervasive or indiscriminate display to the general public of any promotional materials or advertisements on the products or services being offered by third-party clients or even the platform or mobile app itself.

2. Only the following information may be made available in the app, website, or platform:

a. Enumeration of the services offered by the platform itself.

b. Instruction on how to use the said platform.

c. Enumeration of third party partners, and this shall only be limited to the listing of name or logo of the third-party client.

d. Any other information on the platform required to be disclosed by any law or regulatory measures.

3. The disclosure of products and services offered by third-party clients is only for the purpose of completing the transaction enabled by the app, website, or platform.

In the event an entity is engaged, either in advertising or mass media (or any line of business which is nationalized or partly nationalized), it needs to comply with another legal obstacle: The Anti-Dummy Law (ADL). Under the ADL, foreigners are not allowed to be appointed to management positions in the business. Violators would subject to criminal liability.
On this note, can a corporation engaged in the business of quarrying, mining, cutting strip, finishing, setting, purchasing on wholesale basis and dealing in non-metallic ore, among others, be legally allowed to appoint a director (who is a foreign national) as its President? The SEC, in an Opinion issued late last year, said no. Since the corporation is engaged in mining, a partly nationalized activity that limits foreign equity ownership up to 40% only, it cannot have a foreign national as President. Note however that the law allows foreign directors to be appointed in proportion to the equity interest of the foreign beneficial owners.
Despite the above restrictions and limitations, the dreamer in every Juan Dela Cruz should not be discouraged to venture into business. Instead, every Filipino should focus more on the concept, without forgetting the dream (i.e., Dummy Relationships, Advertising and Mass Media). Likewise, they ought to be challenged by the drive to excel and contribute to our economy, not only as a means of livelihood, but as a sense of moral responsibility. For all we know, the next successful entrepreneur is just around the corner.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Reynaldo Q. Marquez, Jr. is a manager with the Tax Services Group of Isla Lipana & Co., the Philippine member firm of the PwC network.
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