Withholding tax on online sellers seen to address revenue leakages

THE GOVERNMENT should ensure that it will be able to properly implement and monitor the collection of withholding tax on online sellers.

The Bureau of Internal Revenue (BIR) recently issued Revenue Regulations (RR) No. 16, which imposes a withholding tax on the gross remittances made by electronic marketplace operators and digital financial service providers to merchants.

Analysts said that the implementation of the withholding tax on online sellers will allow the BIR to better track transactions in the digital economy.

“The implementation of a 1% withholding tax on online sellers is intended to expand the tax base by addressing potential revenue leakages in the growing online retail industry,” China Banking Corp. Chief Economist Domini S. Velasquez said in a Viber message.

“Ideally, the withholding tax system should streamline the tax payment process for online sellers and should have no substantial impact on prices under the assumption that retailers are paying correct taxes,” she added.

Eleanor L. Roque, tax principal of P&A Grant Thornton, said that the measure provides the BIR an additional mechanism to “ensure that taxes are paid by the business owners since their income will also be reported by their withholding agents.”

Ms. Velasquez noted that the imposition of the withholding tax may also mitigate some instances of noncompliance by online sellers.

“This measure is expected to increase government revenues and promote transparency among companies engaged in online retail trade,” she added.

Ms. Roque said that the tax will be an “additional administrative burden” on electronic marketplaces.

“These entities will have to put controls in place to identify remittances to online sellers that are subject to withholding taxes,” she said in a Viber message.

Under BIR regulation, a withholding tax of 1% will be imposed on one-half of the gross remittances by e-marketplace operators and digital financial service providers to the sellers or merchants for the goods and services paid or sold through their platforms or facilities.

However, the tax is not imposed if the annual total gross remittances to an online seller for the past taxable year has not exceeded P500,000; if the cumulative gross remittances to an online seller in a taxable year has not yet exceeded P500,000 or if the seller is duly exempt from or subject to a lower income tax rate pursuant to any existing law or treaty.

The regulation covers marketplaces for online shopping, food delivery platforms, platforms to book lodging accommodations, and other similar online service or product marketplaces.

‘NOT NEW TAX’

Ms. Roque noted the withholding tax is not a new or added tax on online sellers but simply allows for an advance payment of income tax.

“Withholding taxes are just a manner of collecting taxes at source. It does not impose an additional income tax,” she said. “Withholding tax is a mechanism that ensures advance collection of taxes. It also allows the BIR to cross check the amount of income declared by the online seller versus the amount declared by the withholding agent.”

For online sellers whose actual tax payable is higher than the total taxes withheld, this new measure will be a more efficient way of managing tax payments, Ms. Roque said.

“They only need to pay the remaining amount of tax payable so they do not need to shell out a huge amount of tax when paying their final annual income tax,” she said.

“However, for sellers which would have excess payment, they can either use the excess as credits for succeeding periods or decide to file a claim for refund. In case they decide to file a claim for refund, they should consider the cost and time needed to process the claim,” she added.

Earlier this month, TikTok sent an advisory announcing that they would be imposing the 1% withholding tax on all covered sellers.

According to the advisory, sellers’ settlement amount will be less of the withholding tax amount, which will be collected by TikTok Shop and remitted to the BIR, effective Jan. 12.

“The amount deducted as withholding tax may be claimed by the sellers as tax credits in their corporate income tax return,” it added.

On Tuesday, Shopee released an article on its Seller Education Hub on the regulations of the withholding tax and how it will be calculated and deducted.

It also called on sellers to register with the BIR and update their business information to “ensure proper taxation.”

“Withholding tax is not a new type of tax. The collection of withholding tax from online sellers was implemented by the government to maintain fairness of tax obligations between businesses with physical/ brick-and-mortar stores and those selling through online platforms,” Shopee said.

Rodolfo B. Javellana, Jr., president of the United Filipino Consumers and Commuters said that the tax would impact consumers.

“There is never a time when digital financial service providers and online sellers will agree that their profit or income would be reduced. It’s simple — when there’s a tax, it’s passed onto consumers. They will increase the price of their products, and these are passed onto consumers,” Mr. Javellana said in Filipino via Viber message.

“The impact of this tax will be on consumers and the general public,” he added.

Earlier this week, BIR Commissioner Romeo D. Lumagui, Jr. was quoted by ABS-CBN News as saying the withholding tax on online sellers is not a new tax. He noted the measure only aims to encourage more small businesses to register, as well as improve tax collection efforts.

Ms. Velasquez noted a bill that seeks to tax digital transactions would help better capture the digital economy.

In November 2022, the House of Representatives approved the measure seeking to impose the 12% value-added tax (VAT) on nonresident digital service providers. A similar measure is still pending before a Senate committee.

If passed into law, a 12% VAT will be imposed on the digital sale of services like online advertising, video-on-demand subscriptions, and the supply of other services which are delivered through online marketplaces, webcasts and mobile applications, among others.