The new economy: How are online businesses taxed?

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By: Manila Times

A report from the Manila Times by Ellaine Anne Bernardino and Ramon Dy

The coronavirus disease 2019 (Covid-19) pandemic has caused numerous businesses to close and millions of Filipinos to lose their jobs. It has also led countless Filipinos under quarantine to use the internet to earn a living, resulting in a boom in online businesses. It has also prompted many consumers to shift to online transactions to avoid physical contact.

In response, the Bureau of Internal Revenue (BIR) issued on June 1 Revenue Memorandum Circular (RMC) 60-2020 to guide those conducting business through electronic means to comply with their tax obligations and register with the bureau. This is similar to another memorandum issued seven years ago, RMC 55-2013, which identified the most common online business transactions in the Philippines: online shopping or retailing; online advertisements; online intermediary services, such as the Shopee and Lazada shopping platforms; and online auctions.

Taxing online businesses

The Philippines currently has no special legislation that provides for the taxation of online transactions. However, the imposition of tax under the National Internal Revenue Code (Tax Code) makes no distinction between businesses with a physical presence and those with only a virtual one. Therefore, online transactions should be taxed in the same way as conventional ones. Unless a taxpayer enjoys an exemption, he or she is obliged to pay taxes.

Under Republic Act 10963, or the “Tax Reform for Acceleration and Inclusion Act,” which amended the Tax Code, individual taxpayers earning a taxable annual income not exceeding P250,000 are exempt from paying income tax.

On the other hand, corporations conducting business through digital means are liable to pay the corporate income tax rate of 30 percent of their taxable annual income, regardless of the amount. Only those whose yearly income exceeds P3 million are liable to pay the 12-percent value-added tax (VAT).

The individual owner of an online business who has a taxable annual income exceeding P250,000 and gross receipts not exceeding the P3-million VAT threshold can pay either the flat 8-percent income tax rate in excess of P250,000 or a tax based on graduated income tax rates for individuals. But business owners whose annual income exceeds the VAT threshold have no choice but to pay the latter tax rates.

 

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