Digital Economy Taxation Act of 2020: Who is affected and how?

House Bill 6765 or the Digital Economy Taxation Act of 2020 as proposed by Cong. Joey Salceda aims to collect tax on digital services in order to raise an estimated Php29USD 0.49INR 42EUR 0.47CNY 4 billion annual revenue for the government.

HB 6765 has the following provisions:

1) Require “network orchestrated” as withholding agents of income tax. Affected services include Angkas, Grab, FoodPanda, AirBnB, Lazada, Shopee, Zalora, UpWork and similar services that connect customers and suppliers.

Withholding tax is 5% for individuals (Grab, Angkas, AirBnB) if their annual income is less than Php3USD 0.05INR 4EUR 0.05CNY 0.37 Million. The withholding charge is 10% if personal revenue is more than Php3USD 0.05INR 4EUR 0.05CNY 0.37 M a year (most likely for AirBnB hosts earning more than Php250,000USD 4,260INR 361,150EUR 4,058CNY 31,025 a month).

This means that if a customer pays Php300USD 5INR 433EUR 5CNY 37 for their Grab ride, Grab Philippines is required to withhold 5% from the Grab Driver’s earning after Grab gets its 20% share.

So, for the Php300USD 5INR 433EUR 5CNY 37 ride fare, Php60USD 1INR 87EUR 0.97CNY 7 goes to Grab PH, Php12USD 0.20INR 17EUR 0.19CNY 1 is withheld by Grab to remit to BIR and Grab driver gets Php228USD 4INR 329EUR 4CNY 28. Grab PH will give the Grab driver a Form 2307 (Certificate of Creditable Tax Withheld at Source) for the total amount withheld that the Grab driver can use to file their Personal Income Tax come tax time.

For non-individuals, the withholding tax is 10% if the annual gross income is less than Php720,000USD 12,269INR 1,040,112EUR 11,686CNY 89,352 and 15% if more than Php720,000USD 12,269INR 1,040,112EUR 11,686CNY 89,352 a year. This will affect services like FoodPanda where they deal with food suppliers that are mostly registered as a corporation. Other services like Agoda, Booking.com, TripAdvisor, Traveloka might also be required to withhold at source (unless the services do not collect payment upfront).

2) Services rendered electronically shall be charged a 12% VAT. This will affect internet services such as Spotify, Netflix, Amazon Prime Video, iWant, KBO, Disney+, Fox+, YouTube Premium, and the likes.

It’s also likely that digital downloads of apps and games will also be included so this will also affect the Apple iTunes Store, Google Play Store, Huawei AppGallery, Canva, Steam and in-game purchases like buying diamonds from Mobile Legends.

New monthly charges will look like this:

Spotify: Php129USD 2INR 186EUR 2CNY 16 -> Php145USD 2INR 209EUR 2CNY 18
Netflix: Php149USD 3INR 215EUR 2CNY 18 -> Php167USD 3INR 241EUR 3CNY 21

Likewise, digital advertising services like Google Ads and Facebook Ads are also subject to the 12% VAT.

Note: Internet-based companies and online service providers already registered in the Philippines are currently imposing 12% VAT. This includes merchants onboard marketplaces like Shopee, Lazada, Amazon, and Zalora.

Provisions #1 and #2 will harmonize the tax collection since Lazada/Shopee/Zalora will be required to withhold 5%/10%/15% from their merchants and the BIR can use this information to audit those merchants if they actually remit their 12% VAT as well as the compliance with their annual income tax returns.

3) The bill requires that digital service providers have a local agent or a representative office in the Philippines. This means Netflix and Spotify will have to have a physical office in the Philippines and be a registered entity with the SEC/BIR. This also helps protect consumers against unfair trade practices and faster customer service thru their respective local offices.

What House Bill 6765 is proposing isn’t unique to the Philippines. Other ASEAN countries already have this. Last January 2020, Malaysia started charging 6% digital tax and Singapore also charges 7% GST on foreign digital companies.

It’s still too early to say if the Digital Economy Taxation Act of 2020 will actually pass into law and when. It’s unlikely this will get anywhere in 2020 but since the Philippine government is desperately looking for other revenue sources during the time of pandemic, they might see this thru in 2021.