Digital services have grown significantly in the past years especially during the pandemic when mobility was restricted. The growth was spurred by the rise of online marketplaces, which have given traditional brick and mortar stores a run for their money. Readers who are patrons of these digital marketplaces would be familiar with the practice of declaring “mine” to signify a buyer’s intent to purchase a product from an online seller.
Late last year, the Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) No. 16-2023, imposing withholding taxes (WHT) on online sellers. This RR was further clarified by Revenue Memorandum Circular (RMC) No. 8-2024, which was issued last month. This time around, it is BIR’s turn to say “mine” with regard to withholding taxes that the agency aims to collect on the transactions conducted through electronic marketplaces (e-marketplaces) and digital financial services platforms (DFSPs).
WHAT ARE E-MARKETPLACES AND DFSPS?
The RR defined e-marketplace as a digital service platform whose business is to connect online buyers with online sellers; facilitate and conclude the sales; process the payment of the products, goods or services through such digital platform, such as but not limited to the (a) marketplace for online shopping; (b) food delivery platform; (c) platform for booking of resort, hotel, and other similar lodging accommodations; and (d) other similar online marketplaces.
The RR covers all the items above, including the use of other modes of payment such as credit cards, e-wallets of the platforms, and other mobile payment services.
On another hand, a DFSP pertains to the financial technology provided by digital financial services providers which are capable of offering a wide array of services of a financial nature that are made available to the public through the internet, mobile application, or other similar means.
HOW WILL THE WHT APPLY?
Under the RR, remittances of e-marketplace operators and DFSP to online sellers/merchants are subject to 1% WHT. Such a rate applies to one-half of the gross remittances by the former to the latter.
Gross remittance refers to the total amount received by an e-marketplace operator or DFSP from a buyer for the sales paid to the seller through the platform or facility (i.e., e-wallet or other similar modes of payment and money transmission) of the former. Further, it excludes sales returns/discounts, shipping fees, value-added tax (VAT), and any consideration/fee for the use of the e-marketplace and/or digital platform.
However, the WHT obligation does not apply (1) if the annual total gross remittances for the past year has not exceeded P500,000; (2) if the cumulative gross remittances in a taxable year has not exceeded P500,000; or (3) if the seller/merchant is exempt from or subject to a lower tax rate pursuant to any existing law or treaty.
WHAT ARE THE OBLIGATIONS OF SELLERS/MERCHANTS?
First, sellers/merchants must register their business with the BIR and submit a copy of their Certificate of Registration (CoR) to the e-marketplace operator and DFSP prior to the use of the latter’s online facility.
Second, they need to submit a BIR-received Sworn Declaration (SD) to the operator/DFSP declaring that the total gross remittance to be received from the e-marketplace operators or DFSP does not exceed P500,000. Such SD must be submitted to the operators/DFSP upon application as a new seller (or within the 90 days from Jan. 15 in case of existing sellers). Thereafter, the SD must be submitted no later than Jan. 20 annually. However, should the gross remittance exceed P500,000 at any time during the year, the SD must immediately be submitted to e-marketplace operators or DFSPs.
Finally, if the seller/merchant is exempt from tax or subject to a lower rate pursuant to existing law or treaty, it must furnish the DFSP or e-marketplace operator with a certification as proof of the exemption or entitlement to lower rate.
Aside from the obligation to withhold applicable taxes before remitting the payments to sellers, e-marketplace operators and DFSPs must ensure that all sellers are registered with the BIR by requiring the submission of their CoR (BIR Form 2303) prior to allowing them to use their facility.
They must also request certification of entitlement to exemption or lower tax rate for sellers who wish to avail of such incentives. They are also bound to require sellers to submit a copy of the BIR-received SD. Without the certification, they must automatically apply the withholding tax.
Last, they are required to provide withholding tax certificates (BIR Form 2307 using WI760 or WC760 as the Alphanumeric Tax Code or ATC) to sellers as proof of withholding.
COMMENCEMENT OF WITHHOLDING OBLIGATION
The RR provides three instances when the WHT obligation applies. First is upon receipt of the BIR-received SD indicating that the sellers have exceeded the P500,000 remittance threshold. Second is when the seller fails to submit the required BIR-received SD within the prescribed period. Third is when the e-marketplace operator or DFSP has determined that its total gross remittances to the seller have exceeded P500,000.
In the event that the gross remittances exceed P500,000 at any point during the year, the withholding automatically applies on the remittances which exceed the threshold.
E-marketplace operators and DFSPs have 90 days from Jan. 15 to comply with the requirements under the RR prior to the actual imposition of the WHT.
WHAT’S NEXT FOR ONLINE SELLERS?
Contrary to popular belief, this tax on online sellers is not a new tax. Online vendors are subject to income tax on their taxable income. Transactions with domestic vendors are generally subject to creditable withholding tax depending on the nature of the income and classification of the payor based on existing rules. The RR merely implements the government’s right to collect a portion of these income taxes in advance by including the online retail industry in the withholding tax system.
However, online sellers may erroneously consider this as an additional cost. They may then opt to pass on this tax to the customers through a price increase. As such, it is the buying public who may ultimately bear the cost. Nonetheless, looking at the bigger picture, this withholding tax on online sellers will help the government amplify its revenue collection efforts. However, in order for these initiatives to really make a difference in the government collection efforts, it is crucial for online sellers to register their businesses with the BIR and pay their taxes properly.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Edmund James E. Opinio is an assistant manager at the Client Accounting Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.