What taxes am I required to pay for online business transactions? A common query from individuals doing business through the internet. Whether you have a traditional “bricks and mortar” business with physical premises or an online business, tax compliance is a must! This article outlines the tax obligations for different forms of online businesses and transactions in the Philippines.
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In 2013, the Bureau of Internal Revenue (BIR) issued a memo on taxpayer obligations for online business transactions. Revenue Memorandum Circular 055-13 or RMC 055-13 clarifies that, similar to any other type of business in the Philippines, online stores and online intermediaries are required to pay tax – for their e-commerce activities.
RMC 055-13 was issued as a reminder, with the BIR noting that an “increasing number of consumers are visiting and purchasing goods and services from such online stores”.
That was almost six years ago! The number of online businesses has grown since then. So we thought that it’s a good time to outline again the tax compliance requirements for online businesses. Check it out below!
Types of online business transactions
We first need to explore what is meant by an “online business transaction” and an “online business”.
RMC 055-13 identifies the following four most common types of online business transactions – which give rise to an e-commerce tax:
1. Online business or online retailers
A merchant that sells products or services through online channels such as websites and social media accounts. The merchant may or may not also have a physical store. Buying online from these retailers is quite similar to buying from a physical store except that the sale does not include any physical engagement between the seller and buyer.
2. Online intermediary service providers
Online intermediaries are not the direct sellers or producers of products or services. They promote and push sales for online sellers. Online intermediaries receive commissions or incentives by successfully generating sales for the primary seller via referrals and recommendations. It is generally a “principal-agent” relationship between the intermediate and the primary seller. Lazada, OLX and Shoppee are all examples of an online intermediary service that provides a platform for buyers and sellers to meet.
3. Online advertisements
Online advertisements promote products through display ads or banners found on websites or across social media. Website or media owners do not own the products being advertised but are paid for use of the space on which these advertisements are located in order to attract customers.
4. Online auctions
Auctions conducted through websites or social media accounts by an onlines service provider that enable buyers to bid and purchase remotely. An online auction enables a product to be sold through a virtual auction room to a customer willing to bid the highest price.
Registering an online business with the BIR
Online businesses must register with the BIR to ensure compliance with their tax obligations. These obligations are quite similar to that of a traditional business.
File a Certificate of Registration
BIR registration may require submission of the following documentation:
- DTI Certificate of Registration (if applicable)
- Occupational Tax Receipt or Professional Tax Receipt from City Hall or Municipal Hall (if applicable)
- Barangay Clearance
- Proof of Address, e.g. Lease Contract or Land Title Certificate
- Valid identification
To register, individuals (e.g. freelancers) must complete and submit BIR Form 1901. Partnerships and corporations must complete and submit BIR Form 1903.
A BIR registration fee of P500 (which can be paid via an Authorized Agent Bank) is also required.
After submitting the necessary documentation and paying the required fee, a Certificate of Registration and an “Ask for Receipt” banner will be issued to the taxpayer. The books of accounts (check out our recent article on this topics) for the business will also be stamped.
Registration of invoices and receipts
After securing the Certificate of Registration, the taxpayer must apply for an Authority to Print invoices and receipts. This authority can be to issue invoices and receipts either electronically or manually. Companies should identify which system works best for their particular business model.
Standard taxes filed by online businesses
The Certificate of Registration issued to each taxpayer will confirm what type of taxes the particular business must pay. Remember, the Certificate of Registration must be displayed clearly within the business establishment!
Online businesses will pay similar standard taxes to those of physical businesses. Importantly, the BIR has confirmed that existing tax laws and revenue issuances on purchases and sales of goods and services shall apply with no distinction whether the marketing channel is via the internet or through traditional physical mediums. The following are just some of the taxes online businesses will pay:
- Monthly and Quarterly Value Added Tax (required for all businesses earning more than P3 Million in a taxable year)
- Quarterly Percentage Tax (businesses earning P3 Million or less annually not subject to VAT)
- Withholding Tax on Compensation
- Expanded Withholding Tax/Creditable Withholding Tax
- Quarterly and Annual Income Tax Returns
Tax compliance and the submission of tax related documents can be a complex and technical activity for someone without in-depth knowledge of the tax system in the Philippines. CloudCfo provides the highest quality of professional service and a dedicated team for tax compliance services and can help guide your company through the local tax compliance system.
Tax obligations for online retailers
An online seller is required to issue an Official Receipt (if the sale relates to a service) or a Sales Invoice (if the sale relates to a product/good) to a buyer in all cases as proof of sale.
Where payment is received through a credit card company or a bank, additional compliance obligations apply. A seller must issue an acknowledgment receipt to the credit card company or bank for the amount received. Additionally, the seller is required to pay commission to the credit card company net of a 10% Expanded Withholding Tax (EWT).
The generation of BIR forms and sales computations can be done by an in-house accountant or by outsourcing tax compliance services.
Tax obligations for online intermediaries
An intermediary, acting as an agent of the merchant, is required to send Official Receipts to each customer. However, the receipt that will be provided is that of the merchant and not the intermediary. The merchant can assign some of its pads of receipts to the intermediary to enable it to issue the receipt.
The intermediary must ensure the safe delivery of the goods and services by the merchant, along with the receipt of the merchants.
The intermediary must also provide an Official Receipt to the merchant for the amount of the commission received by the intermediary for the sales.
Importantly, if the online intermediary controls the collection of payments from clients and receives commission or markets multiple products for the intermediate’s own account, it will be considered as the principal seller/retailer. As such it is obliged to follow the obligations of an online seller as referenced above.
So if you are operating as an online seller or an online intermediary, it is important to understand your status in the tax compliance system. Our recent article (5 expert finance tips to prepare your tech startup for growth in the Philippines) provides additional information on the importance of understanding the tax implications of your company’s business model
Taxation obligations – online advertisements
Businesses who earn through online advertisements have similar tax obligations to online retail stores. An advertising entity must issue an invoice or Official Receipt to the merchant for the advertising fee and must also receive from the merchant a Certificate of Creditable Tax Withheld at Source.
The merchant/retailer must however deduct 2% EWT from the advertising fees of an online advertiser (i.e. the advertising entity) and remit this to the BIR.
Taxation obligations – online auctions
An online auctioneer must provide Official Receipts for all payments from buyers of bid packs (a bid pack is purchased prior to participating in an auction and enables the purchaser to participate). As with other online businesses, an online auction must issue acknowledgment receipts to banks and credit card companies and pay the required 10% commission of the credit card company.
The online auction store is required to issue an Invoice or Official Receipt for the value of the winning bid to the winning bidder.
RMC 055-13 also makes specific reference to the tax obligations applicable to the use of payment gateways, payment settlement entities, freight forwarders and online website administrators.
Importance of retaining tax compliance services in the Philippines
The BIR requires all online businesses in the Philippines to pay taxes for their e-commerce transactions. These tax requirements can be significant and complex! So make sure you know your business model and the tax implications and required documentation relevant to that model.
CloudCfo provides accounting and bookkeeping services for companies in the Philippines in addition to tax compliance services. Through the use of cloud and smart technology, CloudCfo ensures the highest quality of service and professionalism for all of its clients.