Understanding the 1% Withholding on Half Gross Remittance to Online Merchants: Applicable Only to Philippine Payees Exceeding ?500,000?Annually

Embracing Digital Change in Taxation

In a world where digital transactions are becoming the norm, the Philippine Bureau of Internal Revenue (BIR) has taken a decisive step to ensure a fair and modern tax system with the introduction of Revenue Regulation (RR) No. 16-2023. This new regulation, amending the two-decade-old RR 2-98 as further modified by RR 11-2018, introduces a 1% Expanded Withholding Tax (EWT) on half of the gross remittances by electronic marketplace operators and digital financial service providers to sellers or merchants. This change signifies a crucial pivot towards embracing the digital economy's potential while ensuring equitable tax contributions.

Purpose of EWT: EWT serves as a vital revenue source for the government and a tool for the BIR to verify income declarations accurately.

Legal Basis: Section 57(B) of the Tax Code empowers the Secretary of Finance, upon the Commissioner's recommendation, to mandate the withholding of tax on income payments to residents in the Philippines.

Nature of EWT: It is an advance collection of the estimated tax due from the payee on income received, creditable against the payee's income tax liability.

The Mechanics of EWT

Basic Rules: EWT applies exclusively to payments listed under EWT Regulations. The payee must be a resident of the Philippines, and the tax is creditable, not final.

Time of Withholding: The duty to withhold tax arises when an income payment is made, due, or accrued.

Tax Base of EWT: Generally, the EWT rate is based on total gross income payments.

Impact and Compliance

Effects of Non-withholding: Non-compliance can lead to severe consequences, including non-deductibility of expenses, fines, penalties, interest charges, and even imprisonment.

Treatment of Excess on EWT: Taxpayers can either carry over excess EWT to subsequent quarters (but not to succeeding year) or apply for a cash refund or Tax Credit Certificate.

Remedies for Non-withholding: Payors have several options if the BIR disallows an expense due to non-withholding. These include: paying the tax plus interest, surcharges (if applicable) and penalties provided the payee reported the income; or in case of underwithholding, pay the differential plus interest and penalties.

Practical Illustration

An example illustrates the application of the 1% EWT when the gross remittances to a merchant exceed Php 500,000 per taxable year. For instance, if an online intermediary's gross remittance to a merchant is Php 1,120,000 (gross of VAT), the applicable EWT would be Php 5,000, which is 1% of P500,000, net of VAT or 1/2 of Php 1,000,000 (net of 12% VAT).

E-Marketplace Inclusions

E-marketplaces, including online shopping platforms, food delivery services, and accommodation booking sites, fall under this regulation. These platforms connect consumers with merchants, facilitate sales, process payments, and often provide logistics and post-purchase support.

Conclusion

As public practitioners and taxpayers, we play a crucial role in this transition. By understanding and adopting these regulations, we contribute to a fair and efficient tax system, essential for our nation's growth. Our continuous support and adherence to these new regulations are pivotal in building a robust digital economy.

Need Assistance? For further clarity or assistance, or to find out about possible exemptions from this regulation, please contact us or book an appointment at babylon2k.org. We are here to guide you through these changes. Also, enclosed for your perusal is RR No. 16-2023, providing detailed insights into these new regulations.