BIR: Online sellers must now pay withholding tax

BIR Commissioner Romeo Lumagui Jr. —photo from BIR Facebook page

MANILA, Philippines — The Bureau of Internal Revenue (BIR) on Tuesday said electronic marketplace operators such as Shopee and Lazada have started collecting the withholding tax on sellers or merchants using their platforms.

“Electronic marketplace operators will begin imposing a withholding tax against their sellers/merchants starting July 15, 2024. We have already extended this by 90 days. No further extensions will be given,” BIR Commissioner Romeo Lumagui Jr. said in a statement.

In December last year, the BIR issued Revenue Regulation 16-2023 requiring online merchants with earnings of more than P500,000 annually to be subjected to a 1-percent withholding tax.

READ: BIR imposes 1 percent withholding tax on online merchants

The tax will apply to half of the gross remittances by electronic marketplace operators and digital financial services providers (DFSP) such as GCash and Maya that sellers or merchants use in selling their goods or services through digital platforms. DFSPs also include credit card providers facilitating the settlement of transactions made through the internet and mobile phones.

Gross remittances refer to the total amount received by an e-market operator or e-wallet provider from the online buyers of the goods and services.

READ: BIR to social media influencers: Pay taxes or face charges

The BIR circular provided a 90-day extension to allow affected parties to make the necessary adjustments before the withholding tax is actually imposed.

Plugging loopholes

“The withholding tax is not a new tax. It’s merely a system of taxation where taxes are collected at source, which will be credited against the total income tax liability of the sellers/merchants,” Lumagui noted.

“The BIR aims to level the playing field between brick-and-mortar stores, which are regularly complying with their tax obligations, and online marketplaces. Whether their business is operated online or through physical stores, sellers and merchants have to pay their taxes,” Lumagui said.

The BIR defines e-marketplace as a digital service platform that connects online buyers with online sellers; facilitates and concludes sales, and processes the payment of the products, goods, or services online.

Aside from online shopping platforms, this also includes digital food delivery services and other sites using booking resort, hotel and other lodging accommodations.

The tax agency has required online sellers and merchants to register their businesses with the BIR and submit a copy of their registration certificate to the e-marketplace operator and DFSP before using their online facilities.

For those seeking exemption, merchants must submit a BIR-received sworn declaration to the online platform and DFSP stating that the total gross remittance they are to receive from the e-marketplace operators will not exceed P500,000.

Aside from the obligation to withhold applicable taxes before remitting the sales proceeds or payments to sellers, e-marketplace operators and DFSPs must likewise ensure that all sellers are registered with the BIR before allowing them to use their facility.

At the same time, the mobile payment service or e-wallet used for customer payments must be for the account of the seller’s BIR-registered trade name, for example, a customer using GCash must pay to a store’s BIR-registered GCash account and not to the owner’s GCash number.

Disadvantage to retailers

Roberto Claudio, president of the Philippine Retailers Association, on Tuesday said that while the move was in the right direction, they were confused as to the intention of the memorandum and the specifics of the 1-percent withholding tax.

“If this is the tax to be paid by their foreign merchants and sellers, we find this completely unfair to local retailers who have to contend with a 12-percent value-added tax (VAT),” Claudio told the Inquirer in a message.

If such is the case, a rechargeable battery, for example, sold by a local store will pay the 12-percent VAT, while an online foreign seller will pay only a 1-percent withholding tax for a similar item, he said.

Expected impact

Marketplaces such as Shopee, Lazada, Zalora, TikTok and Shein pay taxes only on the commission they earn from using their platforms and not the VAT, which results in an unfair advantage against local retailers, Claudio added.

Claudio noted that the BIR still has to explain the specifics of the 1-percent withholding tax and how it would be applied to online merchants or sellers.

Many sellers using the top two online shopping sites, Shopee and Lazada, are from China.

Robert Dan Roces, chief economist at Security Bank Corp., said he expected a mixed impact of the latest BIR measure on consumers and sellers.

“While it might generate revenue for the governments, it could also lead to higher prices, reduced choices,” he said.

Roces noted that balancing tax collection goals with practical challenges faced by online sellers would be crucial for the success of the new tax regime.

Rizal Commercial Banking Corp. chief economist Michael Ricafort said that the agency’s move would be more effective in tax collections and would expand the tax revenue sources of the government, especially in the coming years as more businesses decide to use online transactions.

“Given the boom in e-commerce and online businesses worldwide, it makes a lot of economic and fiscal sense to make this a major government revenue source for the years to come,” Ricafort said.