Online shops mushroomed during the coronavirus pandemic. Sellers turned to e-marketplaces, such as Lazada, Shopee, Facebook Marketplace, and many others, to market their products and services and operate the businesses from the comfort of their homes. Shoppers and consumers, on the other hand, found online shopping more convenient and safe amidst the threats of the virus and strict lockdown protocols.
Business enthusiasts took advantage of the big opportunity. While many simply earned decent additional income, others made fortunes. Now, given the potential of e-commerce in the country and its expected sustained growth extending post pandemic, the Bureau of Internal Revenue (BIR), the country’s tax authority, has long reminded online sellers to be compliant with the Tax Code, issued regulations and memorandum circulars, and imposed a tax on online selling.
But, what does the tax mean for small-time or micro online sellers? In Lazada Philippines alone, for instance, there are already more than 20,000 small-time online sellers. In a spontaneous thought, one may think of the online selling tax as a burden, not to mention the necessary BIR filings and compliances. Is that really the case? Wait until you finish reading this comprehensive article.
BIR Revenue Regulations and Memorandum Circulars: Legal Basis
In 2023, the BIR issued the Revenue Regulations (RR) 16-2023, which serves as the framework for the imposition of tax on online selling. This also mentions the Tax Code and other revenue regulations and memorandum circulars, as references for the new tax.
[1] National Internal Revenue Code (NIRC) of 1997. The NIRC, as amended, provides that “the Secretary of Finance, upon recommendation of the Commissioner, shall promulgate all needful rules and regulations for the effective enforcement of the provisions of the Code” (Section 244). Such rules and regulations contain specific provisions, such as but not limited to specifying, prescribing, or defining the time and manner for discovering persons and property liable to national internal revenue taxes, the manner in which the revenue shall be collected and paid, the instrument, document, or object to which revenue stamps shall be affixed, etc. (Section 245).
[2] BIR Revenue Regulations (RR) 02-1998. This prescribes the regulations to implement Republic Act (RA) No. 8424 or the “Tax Reform Act of 1997” relative to the Withholding on Income subject to the Expanded Withholding Tax and Final Withholding Tax, Withholding of Income Tax on Compensation, Withholding of Creditable Value-Added Tax, and Other Percentage Taxes.
[3] BIR Revenue Regulations (RR) 11-2018. This further amends certain provisions of the BIR RR 02-1998 pursuant to the provisions of Section 244 of the National Internal Revenue Code (NIRC) and of Republic Act (RA) 10963, also known as the Tax Reform for Acceleration and Inclusion (TRAIN) Law.
[4] BIR Revenue Memorandum Circular 60-2020. The circular reminds all persons doing business and earning income, specifically those engaged in digital transactions through the use of electronic platforms, media, and other digital means, to ensure that their businesses are registered with the BIR pursuant to the provisions of Section 236 (Registration Requirements) of the Tax Code and compliance with other related regulations.
[5] BIR Revenue Regulations 16-2023. This further amends the provisions of Revenue Regulations 02-1998, as amended, to impose one percent (1%) withholding tax on one-half (½) of the gross remittances made by electronic marketplace operators and digital financial services providers to sellers or merchants for goods and services sold or paid through the former’s platform or facility.
[6] BIR Revenue Memorandum Circular 08-2024. This circular clarifies the provisions of BIR Revenue Regulations 16-2023 for the guidance of all concerned to prescribe the timeline and implementation procedures, as well as address the potential issues and concerns that may arise from the implementation.
Online Sellers and Merchants: Mandatory Taxpayers
Online sellers or merchants, as described in the RR, are the local sellers or online merchants who use the services of electronic marketplaces and digital financial platforms for the marketing and sale of products, goods, or services, shipment of such to the buyers, and payments for the online purchases. Per BIR, the burden of tax is on the online sellers or merchants, although the deductions and modes of payment are through the withholding agents.
e-Marketplaces and DFSPs: Digital Platforms Covered
There are two (2) primary categories of digital platforms covered in the BIR RR 16-2023: electronic marketplaces or e-marketplaces, and digital financial services platforms (DFSPs).
[a] Electronic Marketplace or e-Marketplace. As defined in the BIR RR 16-2023, it is a “digital service platform whose business is to connect online buyers or consumers with online sellers or merchants, facilitate and conclude the sales, process the payment of the products, goods, or services through such digital platform, or facilitate the shipment of goods, or provide logistics services and post-purchase support within such platforms, and otherwise, retains oversight over the consummation of the transaction, such as but not limited to the following: (a) marketplace for online shopping; (b) food delivery platform; (c) platform for booking a resort, hotel, motel, inn, house, condominium unit, bed space, room for rent, and other similar lodging accommodations in the Philippines; and, (d) other similar online service or product marketplaces.”
[b] Digital Financial Services Platform (DFSP). Based on the regulations, it is a “financial technology provided by digital financial services providers which are capable of offering a wide array of services of financial nature that are made available to the public through the internet, mobile application, or other similar means, including banking services, insurance, and insurance-related services, payment and money transmission services, and other similar or related services.”
Withholding Tax on Gross Remittances: Tax to Pay
The tax involved and being withheld is technically a tax on the income (i.e., income tax) of the online sellers and merchants derived from online selling through the e-marketplaces and DFSPs. This is not yet the digital tax, i.e., with the Digital Services Tax Bill still in Congress.
The creditable withholding tax comes as an advanced tax collection or at the time when the income is paid. Upon filing and payment of income tax at the end of the taxable year, the sellers or merchants will then apply the withheld amount as tax credits or deductions from the tax due.
The BIR Revenue Regulations (RR) 16-2023 provides that one percent (1%) withholding tax shall be imposed on one-half (½) of the gross remittances by e-marketplace operators and digital financial services providers (DFSPs) to the sellers or merchants for the goods and services sold or paid through the formers’ platforms or facilities (Section 2.57.2). However, the withholding tax shall NOT apply to the following instances:
[a] If the annual total gross remittances for the past taxable year have not exceeded Five Hundred Thousand Pesos (PHP 500,000.00); or
[b] If the cumulative gross remittances in a taxable year have not yet exceeded Five Hundred Thousand Pesos (PHP 500,000.00); or
[c] If the seller or merchant is duly exempt from or subject to a lower income tax rate pursuant to any existing law or treaty, provided that the concerned seller or merchant is able to secure the necessary certification, clearance, ruling, or any other document servicing as proof of entitlement to the said exemption or lower income tax rate and to submit such to the e-marketplace operator or DFSP.
The ‘gross remittance,’ as the basis for the withholding tax computation, refers to the total amount received by an e-marketplace operator or DSFP from a buyer or consumer for the goods and services sold by or paid to the seller or merchant through the platform or facility, excluding:
[a] Sales returns and discounts; separately billed delivery or shipping fee; and value-added tax, collected by the e-marketplace operator from the online consumer and subsequently remitted to the online seller; and
[b] Consideration for the use of the e-marketplace and/or digital financial services platform
e-Marketplace Operators and DFSP Providers: Withholding Agents
Basically, withholding agents are persons or entities who are in control of the payments subject to withholding tax and therefore are required to deduct and remit taxes withheld to the government.
Based on the revenue regulations, it is not the online sellers or merchants who will serve as withholding agents, but rather the e-marketplace operators and digital financial services platform providers (DFSPs).
Since the tax involved and being withheld is income tax, the burden of the tax is really upon the seller, although the mode of payment of the tax is through withholding by the buyer, or by the e-marketplace or DFSP, in case the payment for the sale of goods and services were made therein. As such, the tax withheld is considered a part of the consideration agreed upon between the seller and buyer, resulting, therefore, in a net take to the seller of only the difference between the agreed consideration or selling price and the tax withheld.
Automatic Tax Deduction: Withholding Process
In case the e-marketplace operator or DFSP has determined that the gross remittances on its online platform to the seller or merchant exceeded PHP 500,000.00 anytime during the taxable year, the prescribed withholding tax will be automatically deducted from the particular remittance exceeding the said threshold, and the same will be imposed on subsequent remittances.
In the event that the payment is transmitted to the seller or merchant through different facilities, the last facility which has control of the payment before completely remitting the same to the seller or merchant will be liable to withhold taxes under BIR RR 16-2023. Payments made outside of the digital platforms will not be subject to the tax.
BIR Registration and Other Documents: Online Sellers’ Obligations
Now, while online sellers or merchants do not need to problematize the tax computation, deduction, and remittance to the government, they must be compliant with the Tax Code and revenue regulations in order to start or continue selling online.
[1] Transitory Phase. The BIR RR 16-2023 took effect on January 11, 2024. E-marketplace operators and DFSP providers were also allowed a period of ninety (90) days from the date of issuance to comply with the relative policies or requirements of other government agencies, if any, and to give them an opportunity to adjust and properly comply with the provisions prior to the actual imposition. Equally, existing unregistered sellers or merchants had to comply with the applicable requirements within the same prescribed period.
[2] BIR Registration. As reminded in the BIR Revenue Memorandum 60-2020 and clarified in 08-2024, all online sellers and merchants must register their business with the Bureau of Internal Revenue (BIR), secure a copy of the BIR-issued Certificate of Registration (COR), and submit it to the e-marketplace operator or DFSP provider. All existing unregistered sellers or merchants selling goods and services in an e-marketplace or DFSP require BIR registration; otherwise, they will not be allowed by the e-marketplace operators and DFSPs.
[3] Sworn Declaration (SD). Also provided in BIR RMC 08-2024, online sellers or merchants must submit a Sworn Declaration (SD) duly received by the BIR and in the form prescribed in Annex “A” of the circular to the e-market operators and DFSPs upon application (or within the transitory period in the case of existing participant sellers or merchants). The SD declares that the total gross remittance to be received from the e-marketplace operators or DFSPs, whether or not exceeding PHP 500,000.00. In case of failure to submit the SD, regardless of the actual total income or gross remittance, the withholding tax will automatically be deducted. After the transitory period, the SD must be submitted on or before the 20th day of the first month of each taxable year.
[4] Payment Channels. Online sellers or merchants are not allowed to receive payments through their personal or individual accounts. Based on the regulations, the accounts or payment channels must, at all times, be under the BIR-registered trade names of the sellers or merchants.
[5] BIR Form 2307 – Certificate of Creditable Tax Withheld at Source. The e-marketplace operators and DFSP providers will be the ones to provide the sellers or merchants with the certificate of tax payment within the period prescribed under the Tax Code and other relevant issuances, or upon request by the latter.
Frequently Asked Questions (FAQs)
In summary of the foregoing discussion, here are the frequently asked questions (FAQs) and answers:
[1] What is the withholding tax rate? The income tax to withhold is one percent (1%) of the one-half of the gross remittances to an online seller or merchant (i.e., if the annual gross remittances exceed Five Hundred Thousand Pesos (PHP 500,000.00)).
[2] When are sellers or merchants exempt from the withholding tax? There are three (3) instances where the sellers or merchants are exempt: (a) if the annual gross remittances have not exceeded PHP 500,000.00; (b) if the cumulative gross remittances have not exceeded PHP 500,000.00; or (c) if the seller or merchant is duly exempt or subject to a lower income tax rate as determined by law.
[3] What happens if sellers or merchants do not comply with the required BIR registration? Online sellers or merchants will not be allowed by the e-marketplace operators and DFSP providers to operate businesses on their platforms. Other violations of any of the provisions of RR 16-2023 will be subject to appropriate penalties under the Tax Code, relevant laws, rules, and regulations.
[4] Who deducts the tax and remits it to the government? The e-marketplace operators and DFSP providers are the ones designated as withholding tax agents; thus, they are mandated to deduct the withholding taxes, prepare and file the returns, and pay taxes to the government.
[5] Are direct/onsite payments to the riders/sellers/merchants for goods and services ordered online subject to the withholding tax? Based on the BIR RR, only those remittances paid by the e-marketplace operators and DFSP providers to the online sellers or merchants will be subject to the online selling tax.
Final Thoughts
When the BIR Revenue Regulations (RR) 16-2023 was released, many online sellers and merchants, without reading and understanding the content first, were concerned about the effects of the tax on their online selling business and the required compliances that come with it.
In reality, the one percent (1%) may easily be passed on to the buyers through small price increases. At the same time, it is the e-marketplace operators and digital financial services platform (DFSP) providers that are mandated by law to deduct the withholding tax on online remittances, prepare and file the tax return, and remit the tax to the government. What may come as a turning point is the required BIR registration, especially for many small-time or micro online sellers who may find it seriously daunting given the documentary requirements, application process, and necessary income tax filings.
… and you might just need our assistance.
Given the technical and legal requirements and processes that online sellers and merchants have to deal with, the assistance of an experienced and efficient tax compliance team can guarantee an organized filing of the documentary requirements, timely issuance of the registration certificate, and an earlier start or resume of your online business operations.
Register as an online seller with the BIR, comply with the tax regulations, and grow your online business. Set up a consultation with FilePino today! Call us at (02) 8478-5826 (landline) and 0917 892 2337 (mobile) or send an email to info@filepino.com.