Imposition of 1% withholding tax on online sellers takes effect

The Bureau of Internal Revenue (BIR) has formally imposed the one percent withholding tax on online platform providers as the government moves to level the playing field among businesses.

In his latest revenue memorandum circular, BIR Commissioner Romeo Lumagui Jr. said all electronic marketplace operators were ordered to impose the withholding tax to sellers and merchants last July 15.

The imposition of withholding tax was supposed to begin in mid-April, but the BIR extended the transitory period for 90 days to give online merchants time to comply with the other related policies or requirements of other government agencies.

“We have already extended this by 90 days. No further extensions will be given,” Lumagui said.

A withholding tax is a kind of tax on the salary earned by a certain employee. Based on the current framework, employers are required to deduct a certain percentage of their employee’s salary, which in turn will be remitted to the BIR.

“This is not a new tax, it is merely a system of taxation where taxes are collected at source, which will be credited against the total income tax liability of the sellers and merchants,” Lumagui said.

“We aim to level the playing field between brick-and-mortar stores, which are regularly complying with their tax obligations, and online marketplaces. Whether their business is operated online or through physical stores, sellers and merchants have to pay their taxes,” he said.

Further, the circular only extended the transitory period for digital financial services providers.

The BIR will impose a withholding tax of one percent on one-half of the gross remittances of the online platform providers to the sellers of the goods and services.

The withholding tax imposed, however, will not apply if the annual total gross remittances to an online merchant for the past taxable year has not exceeded P500,000.

Also excluded are online sellers with cumulative gross remittances to an online merchant in a taxable year that have not yet exceeded P500,000, as well as those cooperatives duly registered with the BIR with a valid certificate of tax exemption.

Gross remittance is the total amount received by an e-marketplace operator or digital financial services provider from a buyer.

According to the BIR, e-marketplace refers to a digital platform whose business is to connect online consumers with online merchants, facilitate and conclude the sales, process the payment of the products, goods or services through the platform.

It also facilitates the shipment of goods or provides logistics services and post-purchase support within such platforms and otherwise retains oversight over the consummation of the transaction.

This includes the marketplace for online shopping, food delivery platforms, platforms for booking of resort, hotel, motel, inn, house, condominium unit, bed space, room for rent and other similar lodging accommodations and other service or product marketplaces.

Data showed that there are roughly two million entities involved in online selling as of last year.

Source: Philstar

PHL digital economy’s share to GDP dropped in 2023

The digital economy’s annual contribution to the country’s economic output decreased as its growth slowed down in 2023, the Philippine Statistics Authority (PSA) reported on Thursday.

Preliminary data from the statistics agency showed the digital economy’s share to the country’s gross domestic product (GDP) went down to 8.4% last year from 8.6% in 2022, making it the lowest share to GDP since 2018.

In terms of gross value added, the digital sector grew by 7.7% to P2.05 trillion last year from the P1.90 trillion recorded in 2022.

However, this was slower than the 9.4% annual increase in 2022. This was the slowest expansion since the 8.7% contraction in 2020 during the pandemic.

The PSA said the digital economy is composed of digital transactions covering digital-enabling infrastructure, e-commerce, digital media/content, and government digital services.

It added the government digital services component to cover the government services directly related to supporting the digital economy.

Digital-enabling infrastructure accounted for the largest of total digital transactions last year amounting to P1.70 trillion or 82.9% of the sector’s total gross value added in 2023.

Digital media/content accounted for 2.9% or P60.21 billion in 2023. This was followed by e-commerce with a 14% contribution or P286.67 billion and government digital services with 0.2% or P4.16 billion.

In employment, there were 9.68 million employed Filipinos in the digital industries, up by 1.6% from 9.53 million in 2022. The employment growth was slower than the 8.5% in the previous year.

Last year, employment in the e-commerce sector had the largest share with 87.3% or 8.45 million employed Filipinos. Following were digital-enabling infrastructure with 11.6% or 1.12 million, digital media/content (1.1% or 104,000), and government digital services (0.1% or 5,000)

“I believe the digital industry wasn’t able to elude the long reach of inflation and sluggish business conditions that characterized 2023,” University of Asia and the Pacific Senior Economist Cid L. Terosa said.

Mr. Terosa said the negative sentiments in the business sector brought by the rising prices, interest rate hikes, and possible wage increase hauled the digital sector’s growth last year.

“If inflation is contained and the interest rate is lowered towards the third quarter of this year, I think the digital industry can recover but its growth trajectory will remain below what was achieved in 2022,” he added.

Inflation last year averaged 6%, higher than the 5.8% in 2022. This was also the highest in 14 years since the 8.2% average in 2008 during the global financial crisis.

The Bangko Sentral ng Pilipinas has hiked borrowing costs by 450 bps from May 2022 to October 2023, bringing the policy rate to a near 17-year high of 6.5%.

Source: Business World

Policies limiting PH digitalization

Digitalization in the Philippines is hampered by outdated policies, and comprehensive reforms are needed to address infrastructure and other issues, the World Bank said.

"Compared to other Asean countries, the Philippines' internet connectivity lags in affordability, speed, and access, creating an uneven landscape for digital participation," the Washington-based multilateral organization said in a January policy note.

Limited internet access is curbing the digital potentials of people and businesses, it added.

"The country's poor broadband infrastructure is rooted in outdated policy frameworks that stifle investment in rural areas and foster a market with weak competition, both of which hinder broadband expansion," the World Bank continued.

"Binding constraints underlying the Philippines poor broadband infrastructure are interrelated, requiring a comprehensive package of reforms to yield desired entry, investments, and sector performance outcomes."

Among others, the World Bank noted that fixed broadband takeup among Philippine households was just 33 percent as of 2022, well below Malaysia's 50 percent, Thailand's 58 percent and Vietnam's 76 percent.

The Philippines, it added, accounts for over 50 percent of the Asean population with no fixed broadband connections.

This has led to a lack of skills, with just 2 percent of Filipinos said to be able to use basic formulas in Excel.

Only 6 percent, meanwhile, can copy and paste into a document, and just 7 percent know how to add an attachment to emails.

In terms of investments, the Philippines spent just 0.44 percent of gross domestic product on telecommunications infrastructure in 2022, down from 0.64 percent in 2018.

This is much lower than at least 1 percent invested by over 100 countries in the last 15 years, the World Bank said.

"Laws on connectivity have remained unchanged despite vast technological advancements, evolving business models, and widening access gap," it noted.

In the "most concentrated, most profitable, and least invested market in the region," the broadband market remains in the hands of a duopoly that is not incentivized nor obliged to expand rural coverage, it added.

The country's regulatory weaknesses, the World Bank said, include barriers to market entry and investments, including a tedious licensing process and the requirement to secure a legislative franchise; an unlevel playing field; ineffective infrastructure sharing policies; and outdated frequency management.

It said that the proposed Open Access in Data Transmission bill, which aims to set a regulatory framework that would expand the internet infrastructure by encouraging investments, would be a "promising, viable start," among other measures.

The bill, passed by the House of Representatives in December 2022 and still pending in the Senate, can be complemented by government investments in a national broadband network and improving access to the masses.

Reforms such as mobile spectrum restacking, which will facilitate higher data speeds; spectrum auctions; and pricing changes could follow.

"The cost of inaction — loss of growth opportunity, people remaining unequipped for future jobs, and widening of the digital divide — is too high for the Philippines," the World Bank said.

"For inclusive growth through digitalization that benefits all Filipinos, updating Philippine policy to promote competition, encourage investment, and upgrade broadband infrastructure is urgent and necessary," it added.

BETTER INTERNET FOR ALL FILIPINOS.pdf

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Source: Manila Times and world Bank