The problems brought by the digital economy are not just faced by our country but shared globally, and it is said to undermine the fairness and integrity of tax systems around the world. Bilateral and multilateral treaties are being considered to prevent these tax leakages, while other countries have decided to impose unilateral measures.
While this problem has existed for some time, the tax erosion and leakages caused by the digital economy has been magnified more recently due to the COVID-19 pandemic. Currently, House Bill No. 7425, which aims to impose Value-Added Tax (“VAT”) on the sale of goods and services through electronic means, is pending before the Senate. Congressman Joey Sarte Salceda, one of the authors of the Bill, estimated that imposing VAT on electronic transactions will result in an incremental revenue for the government in the amount of Php 29.1 billion.
In parallel, the Bureau of Internal Revenue (“BIR”) issued Revenue Memorandum Circular No. 60-2020, compelling businesses, which earn income through electronic means, to register their businesses and, correspondingly, to file and pay the return.
Even with these developments, the basic legal issue that needs to be clarified is when a digital transaction is taxable or not, more particularly its situs. The answer to this is especially challenging in an electronic set-up which blurred the concept of territorial borders, physical presence, and permanent establishment. The case of Commissioner of Internal Revenue vs. Baier-Nickel provides that the “situs of the activity xxx determines whether such income is taxable in the Philippines” regardless of the actual physical source of the money. In the case of Commissioner of Internal Revenue vs. American Express International, Inc. (Philippine Branch), the Supreme Court held that the State must have a “substantial connection,” stating that “place where the output of the service will be further or ultimately used” is immaterial. Just recently, the Supreme Court in the case of Saint Wealth Ltd. v. BIR took a conservative stance, saying that unless there are laws and treaties allowing taxation of the digital economy, the same should remain beyond the jurisdiction of the taxing authority.
The BIR has also issued an opinion supporting the non-taxability of online transactions. The BIR held that domain services rendered abroad through the internet by a non-resident foreign corporation to Philippine domain name holder located in the Philippines are not subject to tax. The BIR noted that since the registration and maintenance of Philippine domain names, which are the activities that produce the income, are performed outside the Philippines, the income derived therefrom is not taxable in the Philippines.
There are also cases which may support the taxability of electronic and online transactions. In the case of Aces Philippines Cellular Satellite Corp. v. Commissioner of Internal Revenue, the Supreme Court ruled that despite the activity being performed through satellites located in outer space, the services are consummated by delivering the services through gateways located in the Philippines. The Supreme Court also pointed out that the provision of satellite communication is state-regulated and thus, creates sufficient nexus to enable the Philippines to tax the same. It will be noted however in this case that there are “gateways,” which in a sense provide for physical presence in the Philippines.
Another case which may support the taxability of online transactions is W Land Holdings, Inc. vs. Starwood Hotels and Resorts Worldwide, Inc. Although the case involves trademark infringement, the concept may be used as a starting point in establishing what constitutes doing business in the Philippines and hence, creating a nexus to the income. The Supreme Court, cognizant of infinite transactions that transpire through the internet, held that “representing the owner’s goods or services through an interactive website may constitute proof of actual use that is sufficient to maintain the registration of the same.” The Supreme Court stated that actual existence or presence is not required before one may be considered as doing business in the Philippines. The presence of an interactive website, through which it actively seeks business from residents of a particular country, is sufficient to establish trade or business in that country.
To date, there is still no law or categorical ruling settling the issue of whether transactions conducted online should be subject to tax. Even with legislation in the pipeline, it still begs the question of how far Congress can tax digital transactions given that it will also result to externalities and conflict of interest between and among countries, which may call for international consensus.
This article is for general information and educational purposes only and not offered as legal advice or opinion.
Evangeline R. Villajuan is an Associate of the Tax Department of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW).