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Digital tax


A report by Bloomberg published in this paper recently indicated that Southeast Asia’s “internet economy” is forecast to double in gross merchandise value to $363 billion by 2025. Citing research from Google, Temasek Holdings Pte, and Bain & Co., Bloomberg noted that e-commerce, travel, media, transport, and food were driving the region’s digital growth.

Online spending was reported to have risen 49% year on year in 2021 to $174 billion, as Southeast Asia was said to have added 60 million new internet users since the start of the pandemic in early 2020. New users came mostly from Thailand and the Philippines. Online shopping alone is seen to account for 64% of digital gross merchandise value by 2025.

“Continued shifts in consumer and merchant behavior, matched with strong investor confidence, have ushered Southeast Asia to its ‘digital decade’ — and the region is on its way towards $1-trillion GMV (gross merchandise value) by 2030,” Google and its partners said in the report. Indonesia is the region’s largest digital economy, where online spending is seen to double to $146 billion by 2025.

Of course, as the regional economy shifts to digital, tax men will not be far behind. And rightly so. Government policies and regulations should also adjust to the changing times, so governments can sustain revenue collection. Such a shift, however, should not rushed. Research and study should pave the way for a thorough understanding not only of how the digital economy works but also how it is seen to evolve.

According to the Department of Finance, government agencies led by the Bureau of Internal Revenue (BIR) and the Securities and Exchange Commission (SEC) were now working together to evaluate how digital business models should be regulated and taxed in the Philippines, in an effort to “broaden the tax base.”

In a statement, Finance Secretary Carlos G. Dominguez III said he wanted the BIR and SEC to have “enough regulatory and collection muscle” to tax digital companies. To his mind, “operating in the digital space is just a platform. The type of activity doesn’t matter. It’s still taxable by the BIR and subject to the appropriate regulations of the SEC.”

The BIR will evaluate “digital” companies’ tax obligations based on categories identified by SEC and the Bangko Sentral. The National Economic and Development Authority (NEDA), meantime, will update Philippine Standard Industry Classifications (PSIC) to possibly include “fintech” activities or entities as a type of financial service provider. The SEC also plans to come up with “fintech-specific” requirements for licensing and data security.

And then in Congress, there is the proposal to impose a 12% value-added tax or VAT on digital services. The intent is to tax sales by digital service providers of goods that are digital or electronic in nature, and services electronically rendered locally. The tax will cover resident as well as non-resident service providers, or those with subsidiaries, branches, or local office operating within Philippine territory.

As I mentioned in a previous column, considering the growing digital economy, I am inclined to support a Digital Services Tax as long as it hits mainly consumers from a higher income bracket. Moreover, as experts from the International Monetary Fund (IMF) noted, “new global reforms will change where tech giants pay taxes in Asia, and make the international tax system more robust.”

“More than half of all services trade in Asia is digitally delivered, making it hard to collect value-added taxes when these services cross borders. Cross-border e-commerce sales of goods have also been exempted from value-added taxes when shipped internationally in small parcels.

“Resolving these challenges pays off,” noted Era Dabla-Norris, division chief in the IMF’s Asia Pacific Department and mission chief for Vietnam; Ruud De Mooij, advisor in the IMF’s Fiscal Affairs Department; Andrew Hodge, economist in the IMF’s Western Hemisphere Department; and, Dinar Prihardini, an economist in the IMF’s Fiscal Affairs Department.

In a blog, the IMF experts noted that “requiring nonresident suppliers of digital services and e-commerce marketplaces to register with local tax authorities and remit value-added taxes on their sales could raise revenue between 0.04 and 0.11 percent of GDP in some countries in Asia, translating to an additional $166 million in Bangladesh, $4.8 billion in India, $1.1 billion in Indonesia, $365 million in the Philippines, and $264 million in Vietnam.

“As Asian consumers and businesses increase their online activity in the coming years, tech giants will expand further into Asian countries, making taxation in a digitalizing economy even more important. Countries in Asia, in particular, can invest in ways to harness digitalization for tax administration, helping to reduce tax evasion, boost revenue mobilization, and make tax collection more efficient,” they added.

In this line, I believe that the Finance department is taking steps in the right direction. Not only the Philippines but the rest of the world will also be looking into how to best tax the digital sale of goods and digital services. However, regulators should try to learn from each other’s efforts, and adopt global best practices in this regard.

I also believe local regulators should take careful and calculated steps, rather than rushed ones, backed by a thorough examination of the digital economy’s tax potential. The government should also adopt a multisectoral approach and give time and resources for wider consultation with the industry and technical experts, in determining the proper and most practical approaches to digital taxation. It should let data and analysis lead the way.

Marvin Tort is a former managing editor of BusinessWorld, and a former chairman of the Philippine Press Council

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