With the recent promulgation into law of Republic Act No. 8792, The Electronic Commerce Act (ECA), which provides for the legal recognition and use of electronic commercial and non-commercial transactions, it now becomes imperative for the Bureau of Internal Revenue (BIR) to introduce this concept into its existing tax administration system.
Section 27 of the ECA directs all government offices to recognize electronic transactions and to transact government business and/or perform governmental function using electronic data messages or electronic documents. The same provision likewise instructs all government agencies to adopt the regulations to carry out this purpose within two (2) years from the effectivity of the E-Commerce Law.
According to BIR Deputy Commissioner Lilia Guillermo during the Global Information Infrastructure Conference (GIIC) pre-conference last July 12, 2000, “In line with this mandate, the BIR will have to restructure its existing tax administration system within the said time span.” Among the critical areas of tax administration which may be designed to accommodate transactions via electronic medium are the following:
Filing of tax returns
The filing of tax returns may be done electronically via the Internet. In fact, the BIR is now securing the appropriate software solution for this endeavor.
Electronic payment of taxes
The established practice now is that all tax payments are made directly with the banks. Guillermo explained, “Since the banking industry is one of the foremost users of E-business methods, we foresee a joint cooperation between the banking sector and the BIR to make e-payment of taxes a reality.”
Issuance of tax clearances, permits, licenses
The BIR is one agency of the government which issues hundreds of documents a day to taxpayers for tax clearance, permits, licenses and certificates of registration. The application for these may be done electronically and the document itself can be transmitted in like manner, thus ensuring a fast and efficient receipt by the taxpayers. “However, the only thing that we cannot do away with is the physical inspection of the premises when required for reason of factual determination,” she added.
Keeping of books and accounts
Even before the promulgation of the ECA, the BIR has been allowing taxpayers to convert their manual books of account into an electronic format for the past ten years or so. “This is subject to minimum restrictions; example, the computerized system must conform to generally accepted accounting and auditing principles and the underlying BIR regulations. Also, we strictly require adequate back-up system.”
Other compliance requirements
In the course of the business operations of taxpayers, they are required by law to submit certain financial reports and records. This may be submitted in electronic format, such as the diskette and compact disc. It is possible that the required information be submitted on-line, although at this time, the cost of the technological infrastructure required to accommodate such a huge data would be too prohibitive for this purpose.
“It goes with the saying that for transactions via an electronic medium, the BIR would have to address concerns on security of data, authentication of writings and signature, data protection and integrity of transmitted documents”, said Guillermo. “If there is one thing that the BIR is too strict about, it is the unauthorized access of information, not only because we are subject to hefty penalties for unauthorized disclosures but also because the element of voluntary tax compliance depends to a great extent on our ability to protect information.”
BIR Policy Directions on E-Commerce
The government in general, the Department of Finance and the BIR in particular, have thus far not made any formal pronouncement regarding the specifics of taxation of electronic commerce. Existing tax laws, regulations and circulars have not been amended to provide for the particular tax treatment applicable to e-commerce. During the deliberations of ECA, several legislators have actually raised a number of taxation issues.
Nevertheless, the legislators deemed it fit not to introduce tax matters in the bill for to do so would be like rewriting a whole set of codal laws over something which has not yet fully evolved in the Philippines.
But the BIR is not at all unaware of the concept and challenges presented by the information technologies that underlie this new way of doing things. It has keenly observed developments in this field and has taken due notice of the outcome of international symposia and conventions on e-commerce taxation such as the APEC-OECD Symposium on International Business Taxation and the latest OECD report on the taxation framework for electronic commerce.
Drawing from this background and factual milieu, Guillermo said that the BIR is at this time, leaning towards the following policy directions insofar as they relate to E-Commerce translations:
Tax neutrality should be the governing principle in the interim. This presupposes that the taxing authority should impose no more taxes upon e-commerce transactions that what is imposed upon the same activity conducted by conventional means. “With the participation of the BIR, this principle has been reduced into a motherhood statement in the draft IRR being prepared by the inter-agency committee headed by the Department of Trade and Industry.”
All of other taxation principles, which guide the government in relation to conventional commerce, should be the same guiding principles applicable to e-commerce transactions.
BIR will harness the potential of e-commerce in bringing about greater efficiency in raising revenues and an improved taxpayer service
BIR will rationalize its role in providing an appropriate fiscal environment within which e-commerce may flourish, ensuring that business decisions should be influenced by economic considerations rather than by considerations.
The tax treatment for e-commerce transactions should have a high international acceptance but must strike a balance between the fiscal sovereignty of the Philippines and the fair sharing of tax base on its counterpart countries with a view to avoiding double taxation.
Specific Concerns on Taxation
While the volume of e-commerce in the Philippines is still presently miniscule compared to the more developed economic regimes, still the BIR recognizes that e-commerce has the potential to grow in leap and bounds in the very near future.
“We cannot present specific treatment with unerring certainty,” said Guillermo. “However, we can make a reasonable analysis of the likely tax scenario, including problem areas, applying existing local tax law and regulations on conventional commerce.”
When the online merchant are both physically present in the Philippines, there should be no issue as to business and income tax liability since the income is already sourced within the Philippines and the BIR can easily apply domestic laws on taxation.
But when the online merchant is a non-resident or physically situated outside of the Philippines while the buyers are Philippine residents, the rule on sources of income and the proper characterization of income become problematic.
One case is the “Permanent Establishment Concept”. Under most of Philippine tax treaties BIR can tax the business profits of a foreign enterprise if it maintains a permanent establishment in the Philippines This concept is defined as the fix place of business through which the business is an enterprise is wholly or partly carried out. With e-commerce the principle of physical business presence is somewhat dilluted because foreign merchants can now exploit the domestic market without establishing a traditional physical presence That’s the on whether or not a web site or a computer server be considered a permanent establishment still largely an open question.
Audit and collection issue. E-commerce transactions are hard to track down and trace in the absence of papers on which to establish audit trails. As it is, the cost of discovery methods for conventional taxable transactions is already quite high. But with the increasing use of electronic processes, our conventional audit skills would have to be enhanced, at considerable expense, to match the required computerized auditing skills in e-commerce regine.
Audit trail issue. There will be an increased pressure to reprogram BIR’s current requirements on paper-based invoice and receipts. The BIR mandates all business establishments to issue these paper-based documents in order to ensure the declaration of the correct taxable sales. With the required two-year period, the BIR would to come up with regulations to permit online transmission of invoices or receipts. It would have to devise reasonable safeguards and conditions to ensure that all compliance requirements are met. Until such regulations are in place, the BIR would have no option but to enforce the existing conventional requirements.
Witholding agents issue. One of the means by which the BIR enforces the collection of taxes is by generally making the payor of income as the witholding agent for the government. That is if the payor or income is a corporation or a juridicial entity since such entity is generally required to be the witholding agent. But this would be absent if more business-to-consumer transaction occurs. However, for payments made through credit cards, the credit card companies are made as the witholding agents for the transaction. However, modern payment modes such as electronic fund transfer or stored value cards are still outside of the witholding tax regulations.
To achieve high international acceptance, the BIR shall implement e-commerce taxation by considering all the internationally agreed and accepted taxation principles and treatment.
Business demands certainty in taxation at all times. Guillermo said, “Toward this end, the BIR shall enlist the participation of the business sector in the development of mutually acceptable general policies and transparent rules in e-commerce transactions.”
“Business should not stop just because of the absence of taxation rules. It should be borne in mind that tax authorities abide by the tenet that a tax cannot be imposed unless the clear and express language of a statute supports it. After all, if e-commerce serves as the effective tool in the development and growth of the national economy, then not only the government gets the benefit but the entire citizenry as well.”