Taxation of the Digital Economy

The digital economy has evolved with the rapid advances in technology. The digitization
of the economy creates benefits and efficiencies as digital technologies drive innovation and
fuel job opportunities and economic growth. The digital economy also infuses all aspects of
society, influencing the way people interact and bringing about broad sociological changes. As
a result of the emergence of new business models, the global business environment has
changed. In this way, the digital economy has changed the process of producing and
marketing goods and services across borders. For instance, Youtube and Spotify are now
being used by many people instead of the usual CDs. We can also see a lot of advertisement
through these digital platforms.

The digital economy is characterized by an unprecedented reliance on intangibles,

huge data consumption, and widespread adoption of multi-sided business structures. These
digital data are derived from digital footprints left by personal, social, and business activity on
numerous digital platforms. Such digitalization have been challenging for our policymakers.

Most countries impose taxes on both income and consumption. While income taxes are
levied on net income, consumption taxes operate as a levy on expenditure relating to the
consumption of goods and services. Taxation of the intangibles has posed a significant
challenge to tax policymakers and administrators, especially because the current international
tax structure was designed with the “brick and mortar” economy in mind. In contrast, the new
business models in the digital economy do not require a physical presence and so they easily
cut across borders. With the rise in the digital economy, opportunities for tax avoidance have
been unveiled.

On May 19, 2020, Digital Economy Taxation Act of 2020 or HB No. 6765 was filed. HB
No. 7425 replaces HB No. 6765 and HB No. 6944, and is currently being deliberated on by the
Committee on Rules of the House of Representatives. HB No. 7425, similar to HB No. 6765,
expands the definition of VAT to include the sale of goods and services including those which
are electronic in nature. Under the bill, a nonresident digital service provider shall be liable for
assessing, collecting, and remitting the VAT on transactions that occur through its digital
platform. Such digital service provider shall be liable for the sale of goods or services through
an online platform, to a buyer who resides in the Philippines and who acquires taxable services

Base Erosion and Profit Shifting Project, Addressing the Tax Challenges of the Digital Economy, 2014
House Bill No. 7425
in the Philippines. In these uncertain times of the pandemic, it is likely that more businesses
and service providers will move online to ensure the health and safety of their personnel and
the public. As it stands, the current VAT regime presupposes that the transaction transpired
within the Philippines, in order to be subject to VAT. Under HB No. 7425, only virtual presence
will be required, provided that the service is obtained by a buyer located in the Philippines.

On August 16, 2021, Revenue Memorandum Circular (RMC) No. 97-2021 was issued.
The BIR has been receiving reports that certain social media influencers are not paying their
taxes despite making a lot of money from different platforms. RMC 97-2021 was published in
response to this, clarifying the tax obligations of all social media influencers. The ultimate goal
is to raise revenue from their unreported income while also reminding them of their legal
obligations. According to the definitions of the BIR, regardless if you are an influencer or a
casual vlogger who earns from making videos, anything that involves the digital economy is
subject to tax.

The power of taxation is an inherent attribute of sovereignty. Without this power, no

State can exist nor endure. The power to tax proceeds upon the theory that the existence of a
government is a necessity and this taxation power is an essential and inherent attribute of
sovereignty. In today’s digital economy, it is challenging to impose taxes especially because of
the intangibles like for example, the influencers. Their income is not fixed because it depends
on how much viewers and subscribers they have. It is going to be hard on BIR because there is
no true method on how you can track who earn revenue through these digital platforms.

Bloomberg Tax, Philippines—Taxation of Digital Transactions, October 2020

House Bill No. 7425