A new study suggests that optimizing Philippine tax laws is necessary to enhance tax collection from digital transactions, including those conducted by foreign companies.
This measure aims to bolster state revenues and bridge a significant budget deficit.
The study, titled “Rethinking Taxation in the Digital Economy,” was presented by Emerson Bañez, an associate professor at UP College of Law, during a webinar organized by the state-run think tank Philippine Institute for Development Studies (PIDS).
Bañez evaluated the complexities of taxing digital transactions and analyzed the digital commerce value chain to propose potential legal framework solutions and reforms.
Bañez emphasized that the current national tax system struggles to generate revenues from digital transactions due to their intricate nature, lack of physical presence, and reliance on intangible assets.
Consequently, the government continues to lose substantial revenue as the digital economy continues to flourish.
Therefore, an optimized and updated tax system is important to keep pace with the boom in digital commerce and to aid the Philippine economy in recovering from the adverse effects of the Covid-19 pandemic.
Furthermore, Bañez identified the practice of base erosion and profit shifting as a concern.
This practice allows online businesses to exploit legal loopholes by shifting their assets and activities across jurisdictions with higher, lower, or no taxes, ultimately enabling them to evade or minimize tax obligations.
Suzette Celicious-Sy, the President of the Tax Management Association of the Philippines, participated in the PIDS webinar as a discussant and stated that existing tax laws in the country are sufficient to address taxation within the digital economy.
She referred to a memo from the Bureau of Internal Revenue (BIR) encouraging online businesses to register and comply with the necessary tax requirements.
However, Bañez proposed new legislation that would impose additional tax liabilities on online businesses and mandate them to act as withholding agents.
This would ensure proper determination of their tax obligations for each transaction.
He also highlighted the importance of multilateral treaties with other countries to counter base erosion and profit shifting.
By entering into such agreements, the Philippine government could extend its tax coverage to online platforms operating abroad and collect taxes from their transactions conducted within the country.
To further strengthen the countermeasures, Bañez suggested that joining the Organization for Economic Co-operation and Development’s (OECD) Two-Pillar Solution could be beneficial.
This solution entails implementing a global minimum tax for multinational enterprises (MNEs) and assigning taxing rights to the MNEs’ home states.
By adopting this approach, the Philippines would enhance its ability to combat base erosion and profit shifting effectively.
A proposal to impose a 12% value-added tax (VAT) on digital transactions is pending before the Senate under House Bill No. 4122.
If passed, this bill would amend Section 105 of the National Internal Revenue Code and subject digital service providers such as Netflix, Amazon, and Spotify to VAT.
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