Philippines needs updated tax laws for the digital economy — PIDS

MANILA, Philippines — The Philippines needs to optimize its tax laws to improve the collection of taxes on digital transactions, including those by foreign companies, to boost state revenues and help bridge a wide budget deficit, according to a new study.

In a webinar organized by state-run think tank Philippine Institute for Development Studies (PIDS), UP College of Law associate professor Emerson Bañez discussed his study titled “Rethinking Taxation in the Digital Economy,” which evaluated the challenges in taxing digital transactions and analyzed the digital commerce value chain to identify possible legal framework solutions and reform.

“The national tax system is struggling to capture revenues from digital transactions due to the complexity of these transactions, the absence of physical presence, and the strong dependence on intangible assets,” he said.

The current tax system only covers traditional businesses, which will result in the government losing substantial revenue as the digital economy continues to boom.

An optimized and updated national tax system will not only keep up with the digital commerce boom but also help the Philippine economy to recover from the losses of Covid-19, Bañez explained.

READ: Taxmen turn to online sellers for cash amid pandemic

He also flagged the practice of base erosion and profit shifting — wherein online businesses can shift their assets and activities across higher-tax, lower-tax, to no-tax jurisdictions — as they allow businesses to find a legal loophole to avoid or reduce taxes.

Tax Management Association of the Philippines President Suzette Celicious-Sy, a discussant at the PIDS webinar, said there are enough tax laws in the country to address taxation within the digital economy, citing the Bureau of Internal Revenue’s (BIR) memo that encourages online businesses to register and secure their required receipts and withholding tax.

“The BIR is aware that there is room for improvement in the monitoring, tracing, and reporting that would capture the revenues of those engaged in digital commerce. They have made issuances to address these comments and observations,” she said.

Currently, a proposal imposing a 12% value-added tax (VAT) on digital transactions under House Bill No. 4122, which will amend Section 105 of the National Internal Revenue Code, is pending before the Senate.

The bill seeks to subject digital service providers operating through online platforms such as Netflix, Amazon, and Spotify, to VAT. 

Countermeasure

Still, Bañez recommended the need for a new legislation mandating additional tax liabilities and requiring online businesses to act as withholding agents to determine how much taxes they must pay for their transactions.

He added that multilateral treaties with other countries can be a countermeasure against base erosion and profit shifting. Such agreements, he said, would allow the government to cover online platforms located abroad and collect taxes from their transactions here.

Bañez noted that joining the Organization for Economic Co-operation and Development’s (OECD) Two-Pillar Solution — which would mandate a global minimum tax for multinational enterprises (MNEs) and attribute taxing rights to the MNEs’ home state — can be part of this countermeasure.