Digital transactions on the rise: Are they taxable?

(Second of two parts)

In last week’s article, we discussed the rise of digital transactions, House Bill No. 7425, and how it proposes to add another section in the Tax Code, which requires non-resident Digital Service Providers (DSPs) to collect and remit the VAT in transactions that go through its platform. We also defined DSPs as a provider of a digital service or goods to a buyer through operating an online platform for the purpose of buying and selling of goods or services, or by making transactions for the provision of digital services on behalf of any person.

In the second part of this article, we will discuss how a VAT-registered non-resident DSP may issue an electronic invoice or receipt to substantiate transactions; the proposed amended VAT exemption on the sale, import, printing or publication of books; and the state of our digital tax laws compared with neighboring ASEAN countries.

ELECTRONIC INVOICING
A VAT-registered non-resident DSP may issue an electronic invoice or receipt to substantiate a transaction. Note that the TRAIN Law requires taxpayers engaged in e-commerce, among others, to issue electronic receipts or sales invoices in lieu of manual receipts or invoices within five years from the effectivity of the TRAIN law (on or before Jan. 1, 2023, subject to the establishment of a reliable system capable of storing and processing the required data). The e-invoicing will effectively create a mechanism for the BIR to properly monitor transactions conducted over the internet and increase the efficiency of tax administration.1

The BIR is also required to establish a simplified automated registration system for nonresident DSPs. However, a transitory period of 180 days from the effectivity of the Act is provided to enable the BIR to establish implementation systems before VAT is imposed on the DSPs.

There may be challenges to ensure the proper monitoring and compliance of non-resident DSPs with the required BIR registration and payment of the appropriate tax. A similar challenge also applies to resident suppliers of electronic or online sale of services.

The BIR was given only 180 days to create a simple yet efficient automated registration system for non-resident DSPs.  Is this enough time for the BIR?

Without efficient monitoring, it may be very difficult to implement and properly collect taxes. We also note that although most of the amendments are seemingly focused on VAT, it is not the DSPs that are being taxed but the consumers with the DSPs acting as a medium to collect VAT from their buyers.

BOOKS SOLD ELECTRONICALLY OR ONLINE
Another provision that the House Bill seeks to amend is on VAT exempt transactions. Currently, the Tax Code provides VAT exemption on the sale, import, printing or publication of books, newspapers, magazines, reviews or bulletins. RMC No. 75-2012 clarified that to be exempt, these should be materials in hard copy. The VAT exemption does not cover those in digital or electronic format or computerized versions.

However, under the proposed House Bill No. 7425, it amended Section 109 (Exempt Transactions) to include books, newspapers, magazines, journals, reviews and bulletins that are sold electronically or online as VAT exempt.

With schools now conducting online classes as the new normal, both educators and learners will need more convenient access to e-books or other educational materials in digital format. The proposed amendment will greatly support the academe in providing affordable quality education.

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT (OECD)
It is also worth mentioning that over the years, there have been global developments in digital tax. In 2015, the OECD published the Base Erosion and Profits Shifting (BEPS) Action 1 Report which recognized the broader tax challenges of the digital economy, in relation to nexus, data and characterization.

In 2019, the members of the OECD or G20 released a Program of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalization of the Economy which focused on a Two-Pillar Approach. Pillar One covers the allocation of taxing rights and seeks to undertake a coherent and concurrent review of the profit allocation and nexus rules, while Pillar Two focuses on the remaining BEPS issues. A final report which will set out the technical details of the consensus-based solution is targeted to be released by the end of 2020. The Philippines may very well follow suit in the near future.

CATCHING UP WITH ASEAN MEMBER COUNTRIES
The additional tax compliance requirements will certainly have an impact on businesses involved in digital services, especially non-residents. These requirements may be daunting and may pose additional burdens to doing business in the Philippines. On the other hand, the proposed bill may be seen as setting the country out on the right track.  Our digital tax laws need to catch up with those of our ASEAN neighbors, which have started imposing either VAT or GST on digital transactions.

Indonesia introduced Reg 48/2020 in May which imposes a 10% VAT, effective July 1, 2020, on cross-border digital transactions. Singapore implemented a new Overseas Vendor Registration (OVR) system which requires foreign digital service providers to register and be charged 7% GST starting Jan. 1, 2020.

Malaysia imposed a 6% Digital Service Tax effective Jan. 1, 2020, on its foreign digital service providers. Laos has been implementing a 10% VAT on supplies of goods and services by electronic means since December 2018, upon effectivity of its amended VAT law.

In Thailand, a draft amendment to the Revenue Code has been approved by the cabinet which would require foreign electronic service providers to pay 7% VAT on digital services. The draft has yet to be approved by parliament.

In this evolving digital era where technology constantly transforms and businesses continue to innovate, the tax ecosystem may falter if its laws fail to adapt to the changing times. Modernization and digitization challenge antiquated tax laws. Progress dictates that such laws be revisited for the benefit of national development.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Jan Kriezl M. Catipay is a Tax Senior Director from the Global Compliance Reporting Service Line of SGV & Co.