THE Department of Finance (DoF) and the Bureau of Internal Revenue (BIR) are working on a program to collect value-added tax (VAT) from digital sales by tech giants such as Netflix, Google, Amazon and Facebook, Finance Secretary Carlos Sonny Dominguez 3rd told reporters last Friday, and are looking ahead to imposing an income tax regime on these firms in the near future. In spite of Secretary Sonnys optimism in describing the objectives, they should probably be filed under the heading, Dont hold your breath.

To be fair to the Finance chief, he probably has no illusions of just how big a challenge imposing taxes on something as nebulous as streamed entertainment will be; after all, he was intentionally and prudently vague in describing a timeline for the rollout of VAT collection efforts, saying only that it would happen as soon as possible. With respect to imposing an income tax collection scheme, Dominguez earlier suggested that proposals for the necessary tax reforms could only be developed once an international agreement is reached on cross-border digital transactions.

There is no question of a legal basis for collecting both VAT and income tax on digital business in the Philippines; goods and services are not less real for not having a physical form, although some changes in the Tax Code may be needed to ensure loopholes are closed. The issue has lately caused a great deal of angst because of the recent circular of the BIR requiring online businesses to register and pay taxes, which will adversely affect tens of thousands of new online entrepreneurs who are not prepared for the effort and expense of tax compliance and will probably have a crushing effect on the economy.

However, while the BIR directive may be ill-timed and poorly constructed, the unavoidable fact is that it is conceptually in line with the governments revenue-collection authority and responsibilities.

The same applies to the imposition of VAT and income tax on cross-border digital transactions The government doesnt just have a choice to collect these taxes, it has a legal obligation to do so. The only flexibility that can be applied is in finding a cost-effective way to do it without excessively discouraging the business activity providing the revenues.Between the two VAT and income tax VAT is probably the easier to manage, but still presents a host of thorny problems that need to be overcome, and based on the tone-deaf nature of the BIRs recent circular on online commerce, it is difficult to have confidence that the governments chief revenue-collecting agency is up to the task. Defining the types of transactions that are done seems to be the biggest task, as there are an almost infinite number of ways activity on the internet can be monetized. For example, how would VAT be applied to a scheme such as Google Adsense, wherein as many as four different parties (Google, a third-party advertising aggregator, a website hosting platform and a website owner) are earning revenue in different ways?

When it comes to income tax on tech firms doing digital business in the Philippines, however, Dominguezs hope that an international agreement could allow the DoF and BIR to begin working on it soon is at this point entirely misplaced and will be as long as the administration of the Tangerine Tyrant Donald Trump is in power in the United States.

Last week, the US scuttled negotiations on an international tax agreement with France, Spain, Great Britain and Germany, saying the proposed agreement which French Finance Minister Bruno Le Maire said was centimeters from being completed unfairly targeted US companies. Countries can still impose their own tax schemes, which is precisely what France intends to do, but the reason some kind of international framework is being sought, and is of critical importance to a country like the Philippines, is that it would help avoid creating another area for trade disputes. Case in point: Frances suggestion that it would begin taxing big US tech firms such as Google and Facebook immediately provoked a threat from Cheeto Mussolini to impose a retaliatory tax on French wine.

That is a risk the Philippines cannot afford to take and Dominguez certainly realizes that, which is why he specified the pre-condition of an international agreement. Unfortunately, no international agreement will be possible as long as US trade policy is dictated by a narrow, protectionist view, so it is pointless to even broach the subject now. If were lucky, it may be something the DoF can work on after January of next year, but even that best-case scenario leaves little time to accomplish it before the end of the Duterte administration in 2022.

ben.kritz@manilatimes.netTwitter: @benkritz

Read the original:

DoF faces uphill battle in taxing tech giants The Manila Times - The Manila Times