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July 31, 2020

As COVID-19 Forces Shift To Distance Learning, Will House Subject It To 12 Percent Tax?

As COVID-19 Forces Shift To Distance Learning, Will House Subject It To 12 Percent Tax? A teacher at Jesus dela Peña National High School in Marikina takes part in a webinar on e-learning on July 21, 2020 in preparation for the opening of classes on Aug. 24, 2020. Photo by Michael Varcas, The Philippine STAR

The House of Representatives ways and means committee seeks to impose a 12-percent value-added tax on the providers of digital transactions – including services vital to information amid the coronavirus disease 2019 (COVID-19) pandemic, such as e-learning, webinars, search engines, online newspapers and social networking sites.

The inclusion of such vital services has mostly fallen under the radar, as statements by committee chairman Rep. Joey Salceda of Albay and many news reports mostly highlighted diversions such as media subscription services, including Netflix and Spotify as well as online stores like Lazada and Shopee.

Salceda pointed out that digital service providers whose sales do not exceed P3 million would not be required to pay the tax. This was his assurance that small online businesses and poor households would not be affected.

Asked for comment about such services that the lower classes would now have to rely on, Salceda simply replied: “Exempted.”

“If your sales are below P3 million, you are exempt from paying or filing VAT. If your net income as a sole proprietor is below 250,000, you are exempt from paying and filing income taxes. So, the small Facebook online seller will not be taxed. I guarantee you.” Salceda explained.

Sought for comment, National Union of Journalists chair Nonoy Espina told The Philippine STAR that the measure is “silly.”

“Unless they intend to either kill business, which they are on the way to doing with the signals they send like the closure of (broadcast media giant) ABS-CBN (Corp.), or clamp down on the internet, to which I say good luck,” Espina said.

As recently as his July 27 State of the Nation Address, President Duterte has ruled out the resumption of face-to-face classes before January.

He stressed that “we must implement online learning,” promising that the Department of Education “will provide printed modules for those who cannot afford online learning,” and that the number of schools with information and communication technology facilities would be increased.

On July 29, Salceda’s committee approved a yet-unnumbered substitute bill, which consolidated his proposed House Bill (HB) No. 6765 with HB 6944 filed by Deputy Speaker Sharon Garin.

Named as co-authors were Representatives Jericho Jonas Nograles, Stella Luz Quimbo, Teodorico Haresco Jr., Jesus Suntay, Estrellita Suansing and Alyssa Sheena Tan.

The wording of Salceda’s original bill broadly enumerated digital advertising services, subscription-based services and “services that can be delivered through an information infrastructure” such as the internet. It was Garin’s bill that first mentioned e-learning and other vital information services.

VAT is an indirect tax that “may be shifted or passed on to the buyer” of purchased goods and services. It is basically a tax on sale or lease of goods, properties or services in the course of trade or business. Whenever taxes on goods are increased, manufacturers and producers offset some of the additional cost to the consumers.

The bill basically amends the National Internal Revenue Code’s provisions on the VAT by inserting the new Section 105-A, covering “persons liable in digital or electronic transactions.”

What are digital services covered by the bill?

The bill lists down several digital services “delivered or subscribed” over the internet or other “electronic network and which cannot be obtained without the use of information technology.” The definitions of the terms were not included in the bill.

 The following are basics that are required in the regular use of computers and mobile phones, and the setting up of websites:

 Online licensing of software, updates and add-ons, as well as website filters and firewalls

  •  Mobile applications
  •  Provision of digital content such as music, files, images, text and information
  •  Advertisement platforms and online advertising space
  •  Database and hosting such as website hosting, online data warehousing, file sharing and cloud storage services
  •  Internet-based telecommunication

 The following are useful for educational purposes, and most of them tend to be available for free:

  •  Webcast and webinars
  • Search engine services
  • Social networks
  • Online training, such as provision of distance teaching, e-learning, online courses and webinars
  • Online newspapers and journal subscriptions

The following have surged in popularity as households purchase goods and run errands online due to the lockdowns:

  • Electronic marketplaces and networks for the sale and display of trade products or services
  • Payment processing services

Also included are recreational activities like video games and online games.

Who will pay the tax?

Under the bill, the 12-percent VAT will be collected from the “nonresident digital service provider” whose platform is used to conduct the online transactions.

The term “digital service provider” includes the following people who operate an online platform for the purposes of buying and selling goods or services, as well as those who make transactions for the provision of digital services:

  • A third party that acts as a conduit for goods and services and receives a commission (Lazada, Shopee)
  • A platform provider that delivers marketing messages to attract buyers (advertisers, Google)
  • A host of online auctions (Ebay)
  • A supplier of digital services in exchange for a regular subscription fee (video-on-demand services like Netflix, music services like Spotify, possibly paywalled media outlets like The New York Times)
  • A supplier of electronic and online services that can be delivered through an information technology infrastructure

A possible source of confusion is that the bill mentions “nonresident digital service provider” as a person liable for the VAT – even as it also includes in the list of transactions subject to VAT the supply of digital services “by any resident or nonresident person.”

Who are required to be registered taxpayers?

As mentioned above, a “nonresident digital service provider” has to register for VAT if his total gross taxable sales or receipts for the past 12 months exceeded or will exceed P3 million.

It must be noted that even free services such as Google or Facebook generate sales through advertisement or keeping the data of its users.

Salceda said the measure could raise about P29.1 billion in new annual revenues to help fund the country’s response to the pandemic. He claimed that 77 percent of such revenues would come from upper middle-income families and only 0.04 percent would be from the poorest 20 percent of the population.

This is just the version approved by Salceda’s committee. The bill will be forwarded to the House plenary, where it will be debated and possibly amended before being approved on second and third reading. Afterwards, it will then be forwarded to the Senate for a new round of deliberations and revisions.

The office of Senate ways and means chair Sen. Pia Cayetano said she would study the measure first. Garin and presidential spokesman Harry Roque did not respond to requests for comment.

Few netizens have caught on to the nitty-gritty of the measure, saying payment services, online groceries or e-learning platforms should no longer be included among those to be taxed.

They also urged the government to run after Philippine Offshore Gaming Operators (POGOs) and public officials who have stolen the people’s money.

Salceda said the taxes are not new and barter trading is not covered. – With Edu Punay

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