SITUS OF TAXATION: ONLINE SALES

In 2013, the Bureau of Internal Revenue (BIR) issued a memo on taxpayer obligations for online
business transactions. Revenue Memorandum Circular 055-13 or RMC 055-13 clarifies that,
similar to any other type of business in the Philippines, online stores and online intermediaries are
required to pay tax – for their e-commerce activities. The basic rule is that the state, where the
subject to be taxed has a situs, may rightfully levy and collect the tax; and the situs is necessarily
in the state, which has jurisdiction, over the subject in question. Hence, we must first look into the
perfection of e-commerce contracts; how they are formed; what constitutes an offer and an
acceptance between the seller and the buyer. It is the perfection of e-commerce contracts that
gives rise to the possible imposition of tax on e-commerce. In a draft revenue regulation, dated
Dec. 17, 2000, regarding Electronic Commerce Transactions, the BIR took the position that, in
general, a nonresident of the Philippines who transacts his business through his Web Site but
does not maintain any warehouse, or a place of distribution, or any business establishment of
similar nature or character located within the Philippines, shall not be treated as having a
physical presence within the Philippines. His income shall not be considered Philippine-sourced
income and, therefore, not subject to Philippine income tax.

When the online merchant (individual or corporation) and the online buyer (individual or
corporation) are both physically present in the Philippines, there is apparently no issue as to
business and income tax liability since the income is clearly sourced within the Philippines.
Goods purchased over the Internet, however, shall be subject to 12% value added tax, which
shall be the liability of the person who imports the goods into the Philippines. The taxation of
Internet transactions becomes more complex when cross-border transactions are involved. When
the on-line merchant is a non-resident or is physically situated outside of the Philippines while
the buyers are Philippine residents, the rules on sources of income and its characterization
become relevant. Things to remember include, receipts from services are subject to VAT only if
the service is rendered in the Philippines, if the service is considered rendered in the Philippines
and therefore subject to VAT, usually, the sellers involved are non-residents. The rules require
that in such case, the payor of the service fee shall be considered as a withholding agent and be
responsible in remitting the VAT.