Features Philippines Policy

Will Philippine plan to tax digital services rescue or hurt pandemic-savaged economy?

23, Jun. 2020

By Darlene Basingan

MANILA, NNA – Like many countries, taxing the digital economy has been on the Philippine government’s agenda way before the outbreak of the novel coronavirus ravaged economies and drained coffers.

Pressured by the urgent need for extra revenue sources to fund the battle against the deadly COVID-19 pandemic as well as recovery efforts, lawmakers in the Southeast Asian country now feel more compelled to impose taxes on the fast-growing digital economy which flourished even more during the pandemic lockdown.

With the months-long lockdown, many Filipinos had turned to media streaming sites like Netflix for past-time. But with the government’s announcement of taxing digital services, some subscribers like Angeline Cuevas worry the plan may only increase subscription fees as shown in a photo taken in Makati city on June 23, 2020 (NNA)
With the months-long lockdown, many Filipinos had turned to media streaming sites like Netflix for past-time. But with the government’s announcement of taxing digital services, some subscribers like Angeline Cuevas worry the plan may only increase subscription fees as shown in a photo taken in Makati city on June 23, 2020 (NNA)

On May 19, the 'Digital Economy Taxation Act' was filed. It sought to slap a 12 percent value-added tax (VAT) on digital advertising services such as those on search engines and social media platforms and subscription-based services, including music and video streaming subscriptions.

The proposed tax, which also covers services rendered electronically and e-commerce transactions on big merchant platforms such as Alibaba’s Lazada, and Shopee, would yield about 29.1 billion pesos ($580 million)in new revenue for the government, said Joey Salceda, the lawmaker who proposed the bill.

Tax collection from both consumers and businesses have significantly dipped since the start of stringent lockdowns to contain the spread of transmissions.

In the first five months of 2020, the total collection by the Bureau of Internal Revenue (BIR) and Bureau of Customs (BOC), plunged to 874.91 billion pesos, which is 289.06 billion pesos or 24.83 percent short of what was collected in the same period last year.

The sharp fall in tax collection and the need for more aid to help families and businesses hit hard in the fallout of the health crisis further fueled concerns about the adequacy of the government’s budget.

Although the Philippines has managed to secure loans from multilateral lenders like the Asian Development Bank and the World Bank, it still needs medium and long-term funding.

“The government needs revenues badly, and the easiest and most convenient to exact taxes from are the ones that are making a killing with the dawn of the new normal,” Ruben Carlo Asuncion, chief economist of the UnionBank of the Philippines, told NNA.

Donabel Villegas, tax manager at professional services firm PwC, told NNA that non-resident companies like Facebook and Netflix have significant market presence in the Philippines but are not covered by the country’s tax system.

For Villegas, taxing digital giants is a move in the right direction. It would “achieve a more equitable tax system that provides a fair taxation for everyone who is earning income from Philippine sources.”

But she noted that tax agency BIR was having difficulty on how to tax electronic and online service providers that do not have a physical office in the country.

However, BIR said it is already crafting the mechanics and methodology on how they would tax the digital giants.

Arnel Guballa, a deputy commissioner of BIR, told NNA that the bureau plans to tax them “as soon as possible”, but it has not set the starting date yet.

Since the legislation is currently in its early stages, it can still be further refined. It should not be rushed for the purpose of raising funds for the pandemic response, Villegas said.

She said the methods used to tax the digital economy should not be too complex, or else, it may lead to more people not paying taxes.

“This consequence may hinder the desired economic growth for our country,” she said.

As more and more businesses have gone online, the government is reminding them to register with the BIR by end-July. After a public backlash, the government said online sellers earning an income of 250,000 pesos or below annually are exempted.

In a televised briefing last week, Guballa said the goal of the registration is to target the big merchants like Alibaba’s Lazada, and Shopee, among others.

Since 2013, online sellers must register with BIR. But with the pandemic driving many businesses to go online, the bureau is implementing a stricter compliance with their registration.

“Pushing for strict implementation of these requirements in these trying times will definitely hurt those who just turned to online selling because they are trying to earn income to survive the impact of this pandemic,” Villegas said.

Nicholas Mapa, senior economist at the ING Bank Manila, told NNA that taxing online sellers would broaden the tax base much more than including digital giants in it.

While more revenues might be collected from both online sellers and digital firms, he is worried that it will slow down consumption, which is the main driver of the economy.

“The government may see higher collections via excise taxes and the like but may inadvertently stifle consumption, lead to lower VAT collections and slow GDP altogether,” he cautioned.

Mapa does not believe that additional taxes on consumption would help government’s efforts to revitalize the pandemic-stricken economy.

Asuncion, chief economist of UnionBank, said taxing consumption-related services and products provided by digital platforms or merchants would potentially increase prices.

“However, it is on the part of the government to assure that services will continue and not be undermined moving forward, especially during this pandemic,” he said.

Villegas of PwC strongly feels that the government should go after the Philippine offshore gaming operators (POGOs) as their top priority target to fill tax coffers. The clients of these Chinese-run online casinos are mostly from mainland China.

BIR’s Guballa said in an online briefing that it has long been pushing for franchise tax on online casinos, but that the law is not clear if POGOs are liable for taxation.

A Philippine senator said POGOs could have owed as much as 50 billion pesos in unpaid taxes.

Villegas said estimates show the figure is much higher, at around 200 billion pesos to 300 billion pesos yearly. This is way higher than 29.1 billion pesos the government seeks to collect from the digital merchants and services, she pointed out.

“Perhaps this is the low hanging fruit that will yield the most harvest,” she said.