Technology and tax

We live in a time of automation, paperless transactions, online shopping and online booking services, and there are no signs the development of such technologies will ever slow down. The key to the popularity of information technology in everyday life is convenience. People seize every opportunity to make life more comfortable and to accomplish their duties expeditiously and effortlessly. Another benefit is reduced cost. Items sold online can be cheaper because of lower selling and administrative overhead.

With the digital economy and e-commerce exponentially growing, our government needs to focus on how to regulate this industry, including how to collect the correct taxes from such businesses and to ensure that they meet tax compliance obligations.

Over the years, the Bureau of Internal Revenue (BIR) has been gradually issuing tax rulings, revenue regulations, and memorandum circulars to clarify the tax treatment of persons engaged in online transactions and e-commerce, as follows:

The sale of products in digital or electronic format

In at least one ruling in 2008, the sale of e-books, e-journals and the like, which appear at regular intervals, available for subscription and sale at fixed prices, and are not principally devoted to the publication of paid advertisements, were considered exempt from value-added tax (VAT). These materials were treated akin to the sale of books, newspapers, magazines, reviews or bulletins exempt from VAT under Section 109(R) of the Tax Code.

The ruling mentioned that the relevant provision of the Tax Code must be read in conjunction with Sections 5(f) and 7 of Republic Act No. (RA) 8792, otherwise known as the Electronic Commerce Act of 2000. Section 5(f) defines the term “electronic document,” while Section 7 states that electronic documents shall have the same legal effect, validity or enforceability as any other documents.

RA 8792 clearly allows for documents/messages/information that are electronically written, capable of being sent, received, recorded, stored, downloaded, transmitted, retrieved and finally reduced into printed form, to be considered as equivalent to print media. Based on this, e-books, e-journals and online library resources were considered equivalent to printed media; the importation and sale of which are exempt from VAT under Section 109(R) of the Tax Code.

However, in subsequent rulings, the BIR used a strict interpretation of Section 109(R). It employed the governing principle in taxation that tax exemptions must be strictly construed against the taxpayer and liberally in favor of the taxing authority.

According to these rulings, the term “book” only applies to printed materials in hard copy. Thus, an electronic copy of any publication does not come within the purview of the terms “books, newspapers, periodicals, magazines, reviews or bulletins” for VAT exemption purposes.

In fact, the BIR issued Revenue Memorandum Circular (RMC) No. 75-2012, providing that books and similar resources pertain to printed materials in hard copy. They do not include digital or electronic copies, online library sources, CDs and software.

Online business transactions

In RMC 55-2013, the BIR clarified that taxpayers engaged in online business transactions (such as online shopping/retailing, intermediary service, advertisement and auction) are on the same footing as physical stores. Hence, they are required to: register the business; secure Authority to Print invoices/receipts; register and maintain books of accounts for use in business; issue registered invoice/receipt for each transaction; withhold and remit tax to the BIR as required by law; file the applicable tax returns/information returns/other compliance reports and pay taxes on time; and keep and make accounting records available anytime for inspection and verification by the BIR.

Persons engaged in the business of land transportation

Because of the popularity of ride-hailing/sharing apps, the BIR issued RMC 70-2015 to cover the tax incidence of so-called transport network companies (TNCs).

The tax treatment provided in the RMC is quite general. The TNC and its partners may be considered common carriers if they are granted a Certificate of Public Convenience. Hence, they are subject to the 3% common carriers tax. Otherwise, they will be classified as land transportation service contractors subject to 12% VAT, or if they so elect, to the 3% percentage tax if the gross annual sales or receipts do not exceed P1,919,500 (now, P3 million).

In the same RMC, whoever receives the payment should issue official receipts (i.e., upon payment of the passenger and upon the distribution of revenue between the TNC and the vehicle owner).

Since then, no other tax guidance has been released by the BIR covering e-commerce or online businesses; neither has there been any jurisprudence on the matter. Considering that there are several other types of e-commerce, such as app-based purchases, online gaming and cloud services, it would be good if more recent rules/guidelines are issued governing the taxation of this industry. These businesses develop and use sophisticated technological innovations. It is possible that these may result in certain complexities in taxation which should be evaluated by the BIR. Otherwise, it may stand to lose billions in uncollected taxes.

On a related note, the reliance of businesses on paper documents for keeping their tax and accounting records is not due to the lack of innovation from businesses in the Philippines (as evidenced by the flurry of innovative ideas we see being pitched at local incubators), but is driven largely by conventional policies from the BIR that still require hard copy documentation. For instance, although the idea of e-invoicing was introduced in 2003, no subsequent guidelines were issued to clarify its implementation. Given the irreversible reality of e-commerce, it is high time for the BIR to complete what it started.

Fortunately, technology-driven documentation guidelines were included in the recently enacted Package 1 of the tax reform program (TRAIN law) which requires the issuance of electronic receipts/invoices by large taxpayers and those engaged in export. Implementation is projected to happen within five years from the effectivity of the law and upon the establishment of a system capable of storing and processing the required data.

Without sounding pessimistic, however, I have reservations on the projected timeline of five years. Considering the wide scope of e-commerce, budgetary/technical constraints can stand in the way of building the required electronic infrastructure to encompass the target objectives; which means, the project may not materialize even in 2023. Nonetheless, the initiative is a positive sign for modernization.

While it is essential for the BIR to impose controls and ensure that records are reliable, complete and accurate, it is equally important for the government to cope with technological changes that stand to benefit both the taxpayers in terms of ease of compliance, and the BIR in terms of curbing tax leakages due to improper taxation of technology-driven businesses and more efficient and effective tax audits.

In this day and age, the imperative is clear. Technological evolution is the way to go.