Republic of the Philippines
HOUSE OF REPRESENTATIVES
Quezon City {

RECEIVED ‘2:\
LATE: MAY 19 20% |

Eighteenth Congress
First Regular Session

HOUSE BILL No. _6765

Introduced by Representative JOEY SARTE SALCEDA

AN ACT ESTABLISHING A FISCAL REGIME FOR THE DIGITAL ECONOMY,
AMENDING FOR THE PURPOSE SECTIONS 57, 105, 108, AND 114 OF THE
NATIONAL INTERNAL REVENUE CODE, AND FOR OTHER PURPOSES

EXPLANATORY NOTE

The digital economy is becoming a rising component of overall commerce. While it has brought
convenience and efficient in many sectors where it is now becoming a competitor, if not the norm,
it is also a largely untaxed segment of the economy. As the Philippine economy moves towards
more digitization, so too must the tax regime, which, for the moment, is better suited to traditional
brick-and-mortar methods of doing business than itis to digital transactions.

This proposal will effect five key changes to the way the digital economy is currently taxed, to
better capture value created into the tax system.

First, it will make “network orchestrators” like Grab, Angkas, and other similar services that link
customers and providers withholding agents for income taxes, to ease their partners of the burden
of having to pay their own taxes, while also encouraging tax compliance.

Second, the bill will clarify that services rendered electronically in the course of trade or business
are liable to Value-Added Tax (VAT). This will, once and for all, set a statutory clarification of a
long-standing question of whether services rendered electronically can be subjected to VAT.

Third, the bill clarifies that such services as digital advertising by internet giants such as Google
and Facebook and subscription-based services such as those of Netflix and Spotify, are subject to
vaT.

Fourth, the bill will make network orchestrators for lease services such as AirBnB, and electronic
commerce platforms such as Lazada and Shopee withholding agents for VAT, easing their partners
of regulatory and tax compliance burden while improving overall tax compliance.


Fifth, the bill requires that those who render digital services must do so through a resident agent
or a representative office in the Philippines. This addresses the issue of businesses having a
significant presence in a country without having a physical establishment here that could be held
liable for tax and regulatory purposes, improving our revenue intake while being better able to
protect consumers from unfair trade practices.

Using conservative figures for estimation, we project that the proposed bill will yield about Php
29.1 billion in new revenues for the government.

Annual revenue estimates (in billions), sales estimates from Statista

Improvement in tax compliance with | 28.55 1.20 | +50% in tax compliance
network orchestrators as withholding
| agents for income tax

Digital advertising VAT 33.1 4.0 | $662 million in revenues

Other digital services (games and 24.05 2.9 | $461 million in revenues

other digital media)

‘Subscription-based services VAT 182 22
© Music streaming (Spotify, etc.) |_2.7 0.3__[ $53 million in revenues
«Video streaming (Netflix, etc.) | 3.2 0.4 [ $63 million in revenues
* Electronic publishing (e- 12.4 1.5 | $248 million in revenues

books)
Network orchestrators as withholding | 28.8 3.5 | 60,000 hosts at
| agents for VAT 40,000/month

E-commerce platforms as withholding | 161.9 9.7 | +50% in tax compliance
| agents for VAT
CIT from digital services 754 5.7 _ | Sum of digital services,

30% pel oma

This bill responds to the increased urgency of finding new sources of revenue to fund the country’s
efforts to recover from the adverse impacts of COVID-19, and anticipates the increasing
digitization of the country’s economy.

In view of the foregoing, the approval of this bill is urgently sought.



Republic of the Philippines
HOUSE OF REPRESENTATIVES
Quezon City

Eighteenth Congress
First Regular Session

HOUSE BILL No. _8765

Introduced by Representative JOEY SARTE SALCEDA

AN ACT ESTABLISHING A FISCAL REGIME FOR THE DIGITAL ECONOMY,
AMENDING FOR THE PURPOSE SECTIONS 57, 105, 108, AND 114 OF THE
NATIONAL INTERNAL REVENUE CODE, AND FOR OTHER PURPOSES

Be it enacted by the Senate and House of Representatives of the Philippines in Congress
assembled:

CHAPTER I
GENERAL PROVISIONS

Section 1. Short Title. — This Act shall be known as the “Digital Economy Taxation Act of
2020.”

SEC 2. Declaration of Policy. — It is hereby declared that the State shall promote fairness
in taxation between goods and services rendered and sold by traditional, physical means, and good
and services rendered and sold through virtual or electronic means. Recognizing that tax policy
needs to be updated to reflect emerging realities in the ways consumers and providers of goods
and services interact, the State shall also promote the most efficient means of collecting revenues
from these new ways of buying and selling goods and rending services.

It shall also be the policy of the State that the tax system shall continue to evolve and shall
endeavor to anticipate new means and modes of transactions among buyers and sellers of goods
and services, in order to preserve the revenue base, especially in view of its expanding needs
arising out of the COVID-19 pandemic.

SEC 3. Definition of terms. - For purposes of this Act:

(a) Digital advertising services shall refer to online advertisement services, any provision for
digital advertising space, any other facility or service for the purpose of online
advertisement;


(b) Electronic commerce platform shall refer to persons, typically information technology
companies, that act as intermediaries by connecting sellers and consumers, usually through
an electronic means of transmission;

(©) Network orchestrator shall refer to persons, typically aided by information technology,
that act create a network of accredited service providers and service consumers, and that
act as intermediaries that facilitate the matching of a consumer's service needs with a
provider's available services.

(4) Services rendered electronically shall refer to services rendered to a consumer through an
electronic means of transmission, typically the internet.

(©) Subscription-based services shall refer to products services rendered electronically in
exchange for a regular subscription fee over the usage of the said product or service.

SEC 4. Section 57 of the National Internal Revenue Code, as amended, is further amended
to read as follows:

SEC. 57. Withholding of Tax at Source. -

(A) Withholding of Final Tax on Certain Incomes. - Subject to rules and regulations
the Secretary of Finance may promulgate, upon the recommendation of the
Commissioner, requiring the filing of income tax return by certain income payees,
the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1);
25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D\(1), 27(D)(2), 27(D)(3),
27(D\(5), 28 (A)(4), 28(A)(5), 28(A)(7(a), 28(A)(7)(b), 28(A\(7)(c), 28(B)(1),
28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of
this Code on specified items of income shall be withheld by payor-corporation
and/or person and paid in the same manner and subject to the same conditions as
provided in Section 58 of this Code.

PROVIDED, THAT WHEN TAXABLE INCOME AND/OR REVENUE IS
DERIVED THROUGH MEMBERSHIP IN A NETWORK
ORCHESTRATOR SYSTEM, THE TAX IMPOSED UNDER SECTIONS
24(A) OF THIS CODE SHALL BE WITHHELD BY THE NETWORK
ORCHESTRATOR.

SEC. 5. Section 105 of the National Internal Revenue Code, as amended, is hereby further
amended to read as follows:

SEC. 105. Persons Liable. - Any person who, in the course of trade or business,
sells barters, exchanges, leases goods or properties, INCLUDING THOSE
DIGITAL OR ELECTRONIC IN NATURE, renders services, INCLUDING
THOSE RENDERED ELECTRONICALLY, and any person who imports
goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to
108 of this Code.


The value-added tax is an indirect tax and the amount of tax may be shifted or
passed on to the buyer, transferee or lessee of the goods, properties or services. This
rule shall likewise apply to existing contracts of sale or lease of goods, properties
or services at the time of the effectivity of Republic Act No. 7716.

The phrase "in the course of trade or business” means the regular conduct or pursuit
ofa commercial or an economic activity, including transactions incidental thereto,
by any person regardless of whether or not the person engaged therein is a non-
stock, nonprofit private organization (irrespective of the disposition of its net
income and whether or not it sells exclusively to members or their guests), or
government entity.

The rule of regularity, to the contrary notwithstanding, services as defined in this
Code rendered in the Philippines by nonresident foreign persons shall be considered
as being rendered in the course of trade or business.

SEC. 6. Section 108 of the National Internal Revenue Code, as amended, is hereby further
amended to read as follows:

(A) Rate and Base of Tax. - There shall be levied, assessed and collected, a
value-added tax equivalent to ten percent (10%) 10 of gross receipts derived from
the sale or exchange of services, including the use or lease of properties: Provided,
That the President, upon the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the value-added tax to twelve percent (12%), after
any of the following conditions has been satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic Product
(GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or

(ii) National government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1 1/2%). [49]

The phrase "sale or exchange of services" means the performance of all
kinds of services in the Philippines for others for a fee, remuneration or
consideration, WHETHER RENDERED ELECTRONICALLY OR
OTHERWISE, including those performed or rendered by construction and service
contractors; stock, real estate, commercial, customs and immigration brokers;
lessors of property, whether personal or real; warehousing services; lessors or
distributors of cinematographic films; persons engaged in milling processing,
manufacturing or repacking goods for others; proprietors, operators or keepers of
hotels, motels, rest houses, pension houses, inns, resorts; proprietors or operators
of restaurants, refreshment parlors, cafes and other eating places, including clubs


and caterers; dealers in securities; lending investors; transportation contractors on
their transport of goods or cargoes, including persons who transport goods or
cargoes for hire another domestic common carriers by land relative to their
transport of goods or cargoes; common carriers by air and sea relative to their
transport of passengers, goods or cargoes from one place in the Philippines to
another place in the Philippines; sales of electricity by generation companies,
transmission, and distribution companies; services of franchise grantees of electric
utilities, telephone and telegraph, radio and television broadcasting and all other
franchise grantees except those under section 119 of this Code, and non-life
insurance companies (except their crop insurances), including surety, fidelity,
indemnity, and bonding companies; and similar services regardless of whether or
not the performance thereof calls for the exercise or use of the physical or mental
faculties. The phrase "sale or exchange of services” shall likewise include:

(1) The lease or the use of or the right or privilege to use any copyright,
patent, design or model, plan secret formula or process, goodwill, trademark, trade
brand or other like property or right;

(2) The lease of the use of, or the right to use of any industrial, commercial
or scientific equipment;

(3) The supply of scientific, technical, industrial or commercial knowledge
or information;

(4) The supply of any assistance that is ancillary and subsidiary to and is
furnished as a means of enabling the application or enjoyment of any such property,
or right as is mentioned in subparagraph (2) or any such knowledge or information
as is mentioned in subparagraph (3);

(5) The supply of services by @ nonresident person or his employee in
connection with the use of property or rights belonging to, or the installation or
operation of any brand, machinery or other apparatus purchased from such
nonresident person.

(©) The supply of technical advice, assistance or services rendered in
connection with technical management or administration of any scientific,
industrial or commercial undertaking, venture, project or scheme;

(7) THE SUPPLY BY ANY RESIDENT OR NONRESIDENT
PERSON OF DIGITAL ADVERTISING SERVICES SUCH AS ONLINE
ADVERTISEMENT SERVICES, ANY PROVISION FOR DIGITAL
ADVERTISING SPACE, ANY OTHER FACILITY OR SERVICE FOR THE
PURPOSE OF ONLINE ADVERTISEMENT;


(8) THE SUPPLY BY ANY RESIDENT OR NONRESIDENT
PERSON OF SUBSCRIPTION-BASED SERVICES, OR SERVICES
RENDERED ELECTRONICALLY IN EXCHANGE FOR A REGULAR
SUBSCRIPTION FEE OVER THE USAGE OF THE SAID PRODUCT OR
SERVICE;

(9) THE SUPPLY OF SERVICES THAT CAN BE DELIVERED
THROUGH AN INFORMATION INFRASTRUCTURE, SUCH AS THE
INTERNET;

({7]10) The lease of motion picture films, films, tapes and discs; and

([8]11) The lease or the use of or the right to use radio, television, satellite
transmission and cable television time.

Lease of properties shall be subject to the tax herein imposed irrespective
of the place where the contract of lease or licensing agreement was executed if the
property is leased or used in the Philippines.

‘The term "gross receipts" means the total amount of money or its equivalent
representing the contract price, compensation, service fee, rental or royalty,
including the amount charged for materials supplied with the services and deposits
and advanced payments actually or constructively received during the taxable
quarter for the services performed or to be performed for another person, excluding
value-added tax.

‘SEC 7. Section 114 of the National Internal Revenue Code, as amended, is further amended
to read as follows:

SEC. 114. Return and Payment of Value-Added Tax. -

(A) In General. - Every person liable to pay the value-added tax imposed under this
Title shall file a quarterly return of the amount of his gross sales or receipts within
twenty-five (25) days following the close of each taxable quarter prescribed for
each taxpayer: Provided, however, That VAT-registered persons shall pay the
value-added tax on a monthly basis.

Any person, whose registration has been cancelled in accordance with Section 236,
shall file a return and pay the tax due thereon within twenty-five (25) days from the
date of cancellation of registration: Provided, That only one consolidated return
shall be filed by the taxpayer for his principal place of business or head office and
all branches.


(B) Where to File the Return and Pay the Tax. - Except as the Commissioner
otherwise permits, the return shall be filed with and the tax paid to an authorized
agent bank, Revenue Collection Officer or duly authorized city or municipal
‘Treasurer in the Philippines located within the revenue district where the taxpayer
is registered or required to register.

(©) Withholding of Value-added Tax. - The Government or any of its political
subdivisions, instrumentalities or agencies, including government-owned or -
controlled corporations (GOCCs) shall, before making payment on account of each
purchase of goods and services which are subject to the value-added tax imposed
in Sections 106 and 108 of this Code, deduct and withhold a final value-added tax
at the rate of five percent (5%) of the gross payment thereof: Provided, That the
payment for lease or use of properties or property rights to nonresident owners shall
be subject to ten percent (10%) withholding tax at the time of payment. For
purposes of this Section, the payor or person in control of the payment shall be
considered as the withholding agent.

The value-added tax withheld under this Section shall be remitted within ten (10)
days following the end of the month the withholding was made.

(D) WHERE PROCEEDS FROM THE SALE OF GOODS AND SERVICES
WHICH ARE SUBJECT TO THE VALUE-ADDED TAX IMPOSED IN
SECTIONS 106 AND 108 OF THIS CODE ARE DERIVED THROUGH
MEMBERSHIP IN A NETWORK ORCHESTRATOR SYSTEM OR AN
ELECTRONIC COMMERCE PLATFORM, AND WHERE THE
PROCEEDS REFERED HEREUNTO ARE PAID THROUGH A
NETWORK ORCHESTRATOR SYSTEM OR AN ELECTRONIC
COMMERCE PLATFORM, THE NETWORK ORCHESTRATOR OR THE
ELECTRONIC COMMERCE PLATFORM, WHICHEVER IS
APPLICABLE, SHALL DEDUCT AND WITHHOLD FROM THE SELLER
THE VALUE-ADDED TAX DUE UNDER SECTIONS 106 AND 108 OF
THIS CODE.

THE VALUE-ADDED TAX WITHHELD UNDER THIS SECTION SHALL.
BE REMITTED WITHIN TEN (10) DAYS FOLLOWING THE END OF
THE MONTH THE WITHHOLDING WAS MADE.

SEC. 8, Resident representative offices or agents of suppliers of digital services. — A non-
resident person shall have the privilege of rendering digital advertising services such as online
advertisement services, any provision for digital advertising space, any other facility or service for
the purpose of online advertisement; subscription-based services; or other similar services as may
be defined by the Commissioner of Intemal Revenue to resident persons exclusively through a



representative office or an agent which shall be a resident corporation in the Philippines. Revenues
derived from the aforesaid services shall, for tax purposes, be revenues generated by the
representative office or agent.

SEC. 9. Resident representative offices or agents of network orchestrators or electronic
commerce platforms. — A non-resident person shall have the privilege of doing business in the
Philippines as a network orchestrator and/or as an electronic commerce platform exclusively
through a representative office or an agent which shall be a resident corporation in the Philippines.
Revenues derived from the aforesaid services shall, for tax purposes, be revenues generated by the
representative office or agent.

SEC. 10. Exclusive power of Interpretation by the Commissioner of Internal Revenue. —
The power to interpret the provisions of this Act shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the Secretary of Finance,

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising under this Act is vested in
the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.

SEC. 11. Separability Clause. — If, for any reason or reasons, any part or provision of this,
Act shall be declared as unconstitutional or invalid, the other parts or provisions hereof which are
not affected thereby shall continue to be in full force and effect.

SEC. 12. Repealing Clause. ~ All provisions of existing laws, orders, rules and regulations
or parts thereof which are in conflict or inconsistent with the provisions of this Act are hereby
repealed, amended or modified accordingly.

SEC. 13, Effectivity. This Act shall take effect immediately upon its publication in the
Official Gazette or in at least two (2) newspapers of general circulation in the Philippines.

Approved,