Add to Cart: Taxing the Digital Economy in the Philippines

By: Kristin Charisse C. Siao, Mely Ann Emerie A. Cristobal, and Raymond John S. Cheng
The people in the Philippines are the heaviest internet users in the world.1   At 10 hours and 2 minutes a day, Filipinos’ average daily internet use far exceeds the global daily average of 6 hours and 42 minutes.2  It should thus come as no surprise that the country’s digital economy is currently valued at about US$3.2 billion3  and is projected to grow to US$25 billion in 2025.4
In the past few years, a growing number of consumers have preferred to make purchases with a click of a button and pay through online means.5  More people are using the internet as a medium to conduct their businesses online. Online retailing through virtual shopping malls, online market places, webstores, and similar websites or “online stores” have proliferated.6  With the continuing threat of the global COVID-19 pandemic, more people can be expected to shift their shopping habits from brick and mortar shops that must strictly observe social distancing to online stores that people can access from the safety of their own homes.
Existing Tax Framework Applicable to Digital Transactions
Currently, the Philippines does not tax digital transactions differently from ordinary transactions. Thus, like any other business establishment, businesses conducted through online means are required to register with the Philippine Bureau of Internal Revenue (“BIR”) and are treated in the same way as any other business establishment.
The BIR has issued a circular on Taxpayers’ Obligations in Relation to Online Business Transactions (the “Circular”). Online businesses are required to comply with regular business requirements, such as:
  1. Securing an Authority to Print and registering the businesses’ books of account;
  2. Issuing a registered invoice/receipt;
  3. Withholding and paying the required taxes;
  4. Filing the applicable tax returns; and 
  5. Keeping books of accounts and other business/accounting records within the time prescribed by law.7
The Circular also includes a classification of the most common types of online business transactions in the Philippines and provides a definition for each:
  1. Online shopping or online retailing — This is a form of electronic commerce whereby consumers directly buy goods or services from a seller over the internet without an intermediary service.
  2. Online intermediary service — An intermediary is a third party that offers intermediation services between two trading parties and acts as a conduit for goods or services offered by a supplier to a consumer for a commission. The relationship between the intermediary and the merchant shall be that of a principal-agent relationship which shall be governed by their agreement. However, in the following instances, the intermediary service provider shall be considered the merchandiser/retailer itself:

    a. when consumers buy goods or services from an intermediary service provider who controls such collection of buyers' payments, and thereafter receives commission from the merchant/retailer; or

    b. when the intermediary markets multiple products for its own account (considered retailer or merchandiser).
  3. Online advertisement/classified ads — This promotion uses the internet to deliver marketing messages to attract customers.
  4. Online auction — These are auctions conducted through the internet via an online service provider that specifically hosts such auctions.
However, the Circular does not provide a specific policy unique to digital transactions.
Similarly, whether taxes may be imposed on the income from online transactions is dependent on the situs of income taxation. In the Philippines, situs of income taxation is determined using the citizenship principle, residency principle and the source principle.8  Resident citizens and domestic corporations are taxed on their worldwide income, while nonresident citizens, aliens (whether resident or nonresident) and foreign corporations (whether resident or nonresident) are taxed only on income sourced from within the Philippines.
In order to be considered as an activity that is generating income within the Philippines, the following rules generally apply:
  • With regard to services, it must be performed within the Philippines;9
  • · With regard to the sale of personal property, the contract of sale must be consummated or perfected in the Philippines.10
As an exception to the situs rules, income of non-resident foreign individuals and corporations not engaged in business in the Philippines may be exempt from Philippine taxes or subjected to lower tax rates if there is an existing tax treaty between the Philippines and the country of residence of the non-resident foreign individual/corporation. However, this is still subject to compliance with the conditions of the applicable tax treaty, such as if the foreign entity does not have a permanent establishment in the Philippines. 
Efforts for Taxation to Capture the Digital Economy
The diffusion of the digital economy has created challenges for international taxation as well as domestic taxation.11  The traditional economy and the existing tax policies are based on the assumption that the situs of taxation is based on the physical presence of the taxable transaction and taxpayer, and, consequently, the physical location determines the jurisdiction who has the power to tax the transaction.12  However, in the digital economy, the entire transaction may be done virtually without a significant physical presence in any jurisdiction.13  Since digital transactions are pervasive but virtual, it is difficult to isolate tax liabilities because the transactions are themselves difficult to isolate. Another issue is on the anonymity of the parties to the taxable transaction. There is significant difficulty in identifying taxpayers in the digital economy due to the absence of a paper trail.
As the market moves forward in the direction of a digital economy, government regulators have sought to keep pace to contain any tax leakages from online transactions. Congress, the Department of Finance and the National Economic Development Authority have begun exploring how to optimize tax collection on digital services.14  Some of the suggestions include: (1) tapping online sales platforms to serve as withholding tax agents for value-added tax (“VAT”) under a digital economy VAT proposal; (2) imposing digital services taxes on subscription to video and music streaming applications; and (3) taxing online advertisements on social networking sites.15  
On 19 May 2020, House Bill No. 6765, dubbed as the proposed “Digital Economy Taxation Act of 2020” was filed with the goal of capturing the value created by the digital economy better in the country’s tax system by making network orchestrators to be withholding agents for applicable income tax and VAT, and by requiring entities that render digital services to conduct business through a resident agent or representative office in the Philippines, among other measures.16  On the same day, Resolution No. 410 was filed in the Senate in order to consider collecting taxes from multinational online streaming services and the digital economy.17  The rapid growth of the digital economy is seen as an opportunity for government to increase tax collection which can be used to address the economic downturn due to the COVID-19 pandemic.18
At the global stage, the Organisation for Economic Co-operation and Development (“OECD”) released last year its “Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalization of the Economy”, which outlines the approach to reach a consensus-based long-term solution on taxation and the global digital economy by 2020.19  The OECD seeks to obtain the agreement of nearly 140 countries on a common plan to tax the digital economy.20  However, countries such as France, Italy, Spain, Austria, United Kingdom, India, and Indonesia have either announced plans or have already started to enact their own measures to  impose tax on digital services revenue.21  Other countries may follow suit to address the economic fallout from the global COVID-19 pandemic.
As of April 2020, the OECD has announced that it still aims to deliver a global tax overhaul by the end of the year, even as the global COVID-19 pandemic continues.22
While the Philippines is not a member of the OECD, policies of the OECD are given great weight by the Philippine taxing authorities. OECD commentaries have also been cited in several rulings of the BIR.
Moving Forward in the Digital Economy
As the Asian Development Bank noted, it is clear that the rise of the digital economy is creating many challenges for policy makers, and they must be attentive to these changes and understand what they are regulating.23  The fast-paced technological development has brought about similar fast-paced changes in the economy. The lawmakers and tax authorities, then, must promptly adapt and reinvent policies to ensure that they are regulating an economy that exists today.24
In order to produce a tax policy that addresses rather than creates tax leakages and double taxation, the governments all over the world must work together with each other and with the stakeholders of the digital economy.

1 Simon Kemp, Digital 2019: Global Digital Overview, DATA REPORTAL, 31 January 2019, available at
2 Id.
3 Id.
4 Lorenz Marasigan, PHL digital economy seen at$25 Billion in 2025, BUSINESS MIRROR, 12 November 2019, available at
6 Revenue Memorandum Circular No. 55-2013.
7 Id.
8 Dino v. CIR, C.T.A. Case No. 9083 (Resolution), 20 November 2018; Spouses De Los Reyes v. CIR, C.T.A. Case No. 9305, 21 February 2019; see also Section 23, National Internal Revenue Code [“NIRC” or “Tax Code”].
9 Section 42(A)(3), NIRC.
10 Section 42(A)(6) & 42 (E), NIRC.
11 Wawan Juswanto and Rebecca Simms, Fair Taxation in the Digital Economy, Asia Development Bank Policy Brief No. 2017-5, available at
12 Id.
13 Id.
14 Jovee Marie dela Cruz, Citira, now CREATE, cuts CIT to 25%; means P259 billion in revenue loss till 2022, BUSINESS MIRROR, 13 May 2020, accessible at; Ben O. De Vera, DOF looks at digital services tax to capture unpaid VAT, INQUIRER, 19 May 2020, accessible at
15 Ben O. De Vera, Salceda wants additional tax on digital services like Netflix, Lazada, FB ads, INQUIRER, 18 May 2020, accessible at
16 Erwin Colcol, Salceda bill seeks to tax Netflix, Spotify, other digital services, GMA NEWS ONLINE, 19 May 2020, accessible at
17 Krissy Aguilar, Revilla bats for imposition of tax on digital content, services, INQUIRER, 19 May 2020, accessible at
18 Butch Fernandez and Jovee Marie N. dela Cruz, Congress seeks to impose taxes on Google-like firms, BUSINESS MIRROR, 20 May 2020, accessible at
19 OECD moves forward on Plans for Taxation and the Digital Economy, KPMG, 25 June 2019, available at
20 Id.
21 Alan Rappeport and Jim Tankersley, Digital Tax Fight Emerges as Global Economic Threat, NEW YORK TIMES, 22 February 2020, accessible at
22 OECD Still Pushing Ahead on Digital Tax Rewrite Despite Pandemic, BLOOMBERG TAX, 24 April 2020, accessible at
23 Supra at note 12.
24 Id.