The advent of ride-sharing applications has truly advanced the lives of millions of people around the world. Aside from providing commuters additional transportation possibilities, ride-sharing applications also opened up business opportunities to investors and drivers.
With the surge in the use of these transportations apps, various governments are in a quandary as to the proper tax treatment that should be applied to businesses under this new industry and have acknowledged the difficulty in properly regulating the same as they operate differently from traditional transport companies.
While other jurisdictions are still reviewing how this industry is to be taxed, the Bureau of Internal Revenue issued Revenue Memorandum Circular No. (RMC) 70-2015 to “deal with the tax incidence of the business of land transportation, particularly transport network companies (TNCs), such as but not limited to the likes of Uber, GrabTaxi, their partners/suppliers and similar arrangements.”
The RMC merely clarifies that companies operating under the TNC model and its partners are subject to income tax; value added tax, percentage tax or common carriers tax (whichever is applicable) and withholding tax as provided under the National Internal Revenue Code of 1997, as amended (Tax Code). Similarly, TNCs and their partners are required to comply with tax compliance obligations under the Tax Code and existing regulations.
The RMC defines TNC as a pool of land transportation vehicles whose accessibility to the riding public is facilitated through the use of a common point of contact which may be in the form of text, telephone and/or cellular calls, email, mobile applications or by any other means. Payment of fares may be made through the same platform or directly to the driver and paid for in cash, through debit or credit card, mobile payment or any other mode. A “partner,” on the other hand, is defined as the owner of the vehicle used in transporting the passenger and/or goods.
For tax purposes, the RMC distinguishes TNCs and partners, who are holders of a Certificate of Public Convenience (CPC), from those who are not. The CPC referred to under the RMC pertains to the certificate issued by the Land Transportation Franchising and Regulatory Board (LTFRB) granting land transportation vehicles for hire a franchise to operate as such. An accreditation issued by the LTFRB is not in itself a CPC and the issuance of which does not make a TNC and /or partner a common carrier.
The RMC clarified TNCs and partners who are holders of a valid and current CPC are classified as common carriers. Thus, its gross receipts are subject to the three percent common carriers tax pursuant to Section 117 of the Tax Code. Otherwise, TNCs and partners shall be classified as “Land Transportation Service Contractors” whose services are, thus, subject to 12 percent Value-added Tax (VAT). However, a partner who is not a holder of a CPC and who has opted not to register as a VAT taxpayer (granting that its gross annual sales and/or gross receipts have not yet exceeded the P1,919,500 threshold) is mandated to pay the three percent percentage tax under Section 116 of the Tax Code.
Further, the RMC emphasized that, just like any other business, TNCs and their partners are mandated to register with the Revenue District Office (RDO) having jurisdiction over their principal place of business; pay the registration fee; secure a BIR Certificate of Registration which must be displayed conspicuously in its business establishment; secure an authority to print (ATP) official receipts and register books of accounts for use in its business, which may either be manual or a computerized accounting system, as required under the Tax Code and existing regulations.
The BIR further stressed the TNC and Partner’s responsibility to issue officially receipts (OR) for every sale, barter or exchange of service. The ORs issued must conform to information requirements prescribed under existing revenue issuances. Under the RMC, the obligation to issue an OR rests on the individual or entity (which may either be the TNC or the Partner) who receives the payment from the passenger. Likewise, an OR must also be issued for any payment received by the partner from the TNC and vice-versa.
The BIR expounded on the payee’s obligation to issue an OR upon receipt of payment by providing guidance on the two possible manners of payment under this transportation arrangement.
• In cases where the payment is made by the passenger to the TNC and the TNC pays the partner, the TNC is required to issue an OR to the passenger for the total amount of money received. If the TNC is a holder of a valid CPC, it must issue a valid non-VAT OR and it is liable for the three percent common carriers tax. Otherwise, the TNC must issue a valid VAT OR to the passenger and as a land transportation service contractor, its services are subject to the 12 percent VAT.
Upon receipt of the partner of its share of the payment from the TNC, it is likewise required to issue a non-VAT OR and its gross receipts are subject to the three percent common carriers tax if it is a holder of CPC. Otherwise, the partner who is considered to be a land transportation service contractor must issue a VAT OR if it is a VAT-registered taxpayer or a non-VAT OR if it has not yet exceeded the threshold of P1,919,500 and has not opted for VAT registration. As previously discussed, non-VAT registered partners are mandated to pay a percentage tax of three percent based on its gross receipts.
• In the scenario where payment is made to a partner and the partner pays the TNC, the partner is required to issue an OR to the passenger for the full amount of money received from the passenger. If the partner is a holder of a valid CPC, it shall issue a non-VAT OR and its gross receipts shall be subject to the three percent common carriers tax. If the partner who is not a holder of a CPC and is thus considered as a land transportation service contractor should issue either a VAT OR if it is a VAT-registered taxpayer or a non-VAT OR, as the case may be.
Upon the TNCs receipt of the partner’s payment, the TNC must issue an OR to the partner for the amount received. Likewise, if the TNC is a holder of a CPC, it must issue a non-VAT OR and its gross receipts shall be subject to the three percent common carriers tax. Otherwise, it is required to issue a valid VAT receipt since as a land transportation service contractor, its services are subject to the 12 percent VAT.
The RMC also reminds TNCs and partners of their obligation to properly withhold taxes and remit the same to the BIR at the times required and issue to concerned payees the required Certificate of Tax Withheld pursuant to relevant provisions under the Tax Code and Revenue Regulations 2-98, as amended.
The RMC further reiterates that payments made by TNCs and partners shall not be allowed as a deductible expense unless properly substantiated, evidenced by a valid OR, and for which withholding taxes have been properly withheld and remitted to the BIR.
The TNC and partners are also reminded of their responsibility to file the appropriate tax returns and the necessary information returns as well as tax compliance reports as mandated by law and existing regulations.
While the BIR’s effort to clarify the proper rules of taxation applicable to this new breed of land transportation arrangement is noteworthy, a blanket tax treatment may not be sufficient to address the various possibilities of business models under this new industry. Thus, TNCs and partners whose business model differs from the scenarios envisaged by the RMC must seek its own clarificatory ruling pending the release of further regulations by the BIR covering the same.
With our transportation sector still trailing behind our international neighbors, the continued surge in the growth of this new industry is to be expected. Hence, a deeper understanding of the underlying arrangements of this novel business concept may be necessary to provide taxpayers adequate guidance and thereby encourage the players of this industry to positively contribute to our country’s growth and development.
Monica D. Calimbas is a supervisor from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice, Tier 1 transfer pricing practice and Tier 1 leading tax transactional firm in the Philippines by the International Tax Review.
This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email ph-inquiry@kpmg.com or rgmanabat@kpmg.com.
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