Proposed withholding tax on online sellers expected to boost compliance

By Luisa Maria Jacinta C. Jocson, Reporter

THE BUREAU of Internal Revenue’s (BIR) proposal to require online platform providers to impose a creditable withholding tax on their partner merchants is expected to improve tax compliance, experts said.

“The withholding tax system is a good control mechanism to ensure that all income earned by individuals or businesses is properly taxed. It allows the BIR to secure information from withholding agents and compare it with the income declared by sellers in their tax returns,” Richard R. Ibarra, a tax director at P&A Grant Thornton, said in a phone interview.

“The online platform providers will be mandated to withhold and remit tax to the BIR. As such, the online sellers will have no choice but to correctly declare their sales transactions,” he added.

Last week, the BIR announced its plan to amend Revenue Regulation No. 2-98, which sets the rules for withholding tax on income. The rules do not cover transactions by online platforms.

The draft rule calls for a creditable withholding tax of 1% on one-half of the gross remittances of online platforms to their partner sellers or merchants.

It defined an online platform as any entity that serves as an intermediary, where sellers and buyers of goods and services transact through the use of information technology and other electronic means, and deputized it to act as the government’s withholding agent.

These include marketplaces, food delivery services, lodging accommodation, travel or transportation, payment or remittances such as e-wallets, and other services.

The proposed withholding tax will also be imposed in addition to other existing withholding tax obligations, the BIR said.

Online platforms that do not require business registration from sellers will only collect withholding tax on single transactions of goods or services worth P10,000 and if the same buyer and seller have engaged in at least six transactions, regardless of amount per transaction, in the previous or current year.

Eleanor L. Roque, head of the Tax Advisory and Compliance Division of P&A Grant Thornton, said online providers would need to have the systems and procedures in place to capture the withholding tax.

“It’s additional compliance cost for online platform providers,” she said in a Viber message.

Ms. Roque said the BIR should allow for situations where the seller’s total taxable income does not exceed P250,000 a year.

“This amount is not taxable; hence, any creditable withholding tax will not be useful for the online seller. So, the withholding tax should only apply if the taxable income of the seller exceeds P250,000 annually,” she said.

Under the Tax Reform for Acceleration and Inclusion law, people with income below P250,000 are exempt from paying personal income tax.

Mr. Ibarra said the BIR should also find ways to better educate online sellers on their compliance requirements.

“One challenge is the lack of documentation compliance by online sellers. They usually do not issue valid invoices or official receipts. Either they are not aware of the requirements, or they just do not know how to comply,” he said.

Albay Rep. Jose Maria Clemente S. Salceda, chairman of the House Ways and Means Committee, said in a Viber message the proposal would improve BIR efforts in collecting income tax from online merchants.

But the proposal is “not yet an imposed tax in the strictest sense” because it is credited against future income tax liabilities.

“Furthermore, the rate is analogous with the standard rate imposed on the income of credit card companies to establishments (50% of 1%) since online service providers are also financial intermediaries of payments to merchants. They even have their own layaway or installment options similar to credit cards. So, nothing irregular or unusual in this new regulation,” Mr. Salceda said.

“The better way is to include everyone in the VAT (value-added tax) regime so that we can lower the rate — perhaps to even 8% or 9%. But that requires the force of legislation,” he added.

The BIR has been seeking ways to tax the digital sector, as e-commerce surged during the pandemic as people were forced to stay home.

Last year, the digital economy accounted for 9.4% of the gross domestic product, equivalent to P2.08 trillion. This exceeded the pre-pandemic level of P1.96 trillion in 2019.

Employment in the digital economy rose by 8.2% to 6.05 million last year.

The Department of Trade and Industry estimates the number of entities doing business as online sellers at two million as of 2022.