Research Paper Series No.

2024-04

Rethinking Taxation
in the Digital Economy:
Approaches to Harnessing
Online Markets

Emerson S. Bañez

Philippine Institute for Development Studies

Surian sa mga Pag-aaral Pangkaunlaran ng Pilipinas
Copyright 2024

Published by
Philippine Institute for Development Studies

Printed in the Philippines. Some rights reserved.

The views expressed in this paper are those of the authors and do not necessarily
reflect the views of any individual or organization.

Please address all inquiries to:

Philippine Institute for Development Studies

18th Floor, Three Cyberpod Centris - North Tower
EDSA corner Quezon Avenue, 1100 Quezon City
Telephone: (63-2) 8877-4000
Fax: (63-2) 8877-4099
E-mail: publications@[Link]
Website: [Link]

This research paper is under the Creative Commons Attribution Noncommercial

License. It shall not be used for commercial purposes. Anyone can use, reuse,
distribute, and build upon this material as long as proper attribution is made.

ISSN 1908-3297
ISSN 2508-0830 (electronic)
RP 04-24-600
DOI: [Link]

Editorial and production team:

Sonny N. Domingo, Gizelle G. Manuel, Wenilyn M. Asuncion, and Maryam P. Tubio
Table of Contents

List of tables, figures, and annexes v

List of acronyms vii
Acknowledgment ix
Abstract xi
Introduction 1
Review of related literature 2
Overview of the problem 2
Legal principles 4
Proposed solutions 7
Taxation of digital commerce in the Philippines 18
Research methodology 25
Data collection and analysis 30
Capturing actors and flows of value 30
Discovering network structure of actors and flows 34
Discovery of completeness of tax regime modalities 38
Findings and recommendations 43
Centrality of platforms 43
Disparity of tax coverage 44
Recommendations for reform 46
References 50
Annexes 54
The Author 59

iii
List of Tables, Figures, and Annexes

Table
1 Proposed value chain model for digital economy 28
2 Sample use case for a revenue model (sale and delivery of 29
physical goods)
3 Revenue models, implementation-based variations, 32
and examples
4 Actors involved in the “purchase and delivery of tangible 33
goods” revenue model variation
5 Actors and flows of value involved in the “purchase 35
and delivery of tangible goods” revenue model variation
6 Adjacency matrix representation of the presence of flows 37
of value in the “purchase and delivery of tangible goods”
revenue model variation
7 Adjacency matrix of the robustness of the tax regime in the 39
“purchase and delivery of tangible goods” revenue model
variation (on Philippine-based parties)
8 Adjacency matrix representation of the robustness of the 41
tax regime in the “purchase and delivery of tangible goods”
revenue model variation (assuming platform is US-based)

Figure
1 Graphical representation of the flows of value in 37
“purchase and delivery of tangible goods” revenue
model variation
2 Weighted, directional network of value flows reflecting 42
robustness of tax law applicable to the flow

Annex
A Revenue models for online businesses 54
B Sample revenue flow analysis 56

v
Acronyms

ASEAN Association of Southeast Asian Nations

BEAT Base Erosion Anti-Abuse Tax
BEPS base erosion and profit shifting
BIR Bureau of Internal Revenue
COVID-19 coronavirus disease 2019
CREATE Corporate Recovery and Tax Incentives for Enterprises
DMCA Digital Millennium Copyright Act
DST digital services tax
EU European Union
EUR euro
GST goods and services tax
HB House Bill
IaaS Infrastructure as a Service
ICT information and communications technology
IP Internet Protocol
ISP internet service provider
MNEs multinational enterprises
NIRC National Internal Revenue Code
OECD Organisation for Economic Co-operation and Development
PaaS Platform as a Service
PHP Philippine peso
PoS point-of-sale
SaaS Software as a Service
SGD Singapore dollar
RA Republic Act
RMC Revenue Memorandum Circular
TNCs transport network companies
UK United Kingdom
UN United Nations
US United States
USD United States dollar
VAT value-added tax

vii
Acknowledgment

The author expresses gratitude to the anonymous reviewer for

providing invaluable insights to improve the clarity and organization
of the paper. Additionally, the author would like to acknowledge the
contributions of Atty. Remir Macatangay, revenue district officer of
the Bureau of Internal Revenue, for guidance on Philippine tax law
and tax administration.

ix
Abstract

The study aims to evaluate the country’s legal framework for taxing
digital transactions, specifically the extent to which provisions of
the law can map onto the value of digital markets. Based on findings
on the structure of the digital commerce value chain and its possible
interactions with both current and proposed tax regimes, the study
provides four policy prescriptions: (a) optimize existing tax authority
over platforms, (b) have a digital-ready tax administration, (c) expand the
scope for investigation and liability, and (d) engage at the international
level. Nonresident providers are the ones that have gained the most
from digital markets while minimizing the tax impact of their activities.
The Philippines should continue to explore multilateral options for
the reallocation of taxing rights as well as address the issue of “base
erosion and profit shifting”. Such options include regional tax treaties
and the Organisation for Economic Co-operation and Development’s
framework treaty. Efforts at negotiating and crafting the provisions
should take into account the Philippines’ trading power relative to other
countries, and its comparative ability to exercise jurisdiction.

xi
Introduction

The COVID-19 pandemic has turned the digital transformation of the

Philippine economy from a goal for competitive edge to one of utmost
necessity. Mobility restrictions and social distancing—imperative actions to
limit the spread of the virus—have made many transactions that require
physical presence and face-to-face interaction impractical. The ability to
deploy services online and maintain meaningful connections to markets
through digital platforms has become a determinant of resilience.
Digital technology not only provides continuity but can also
unlock new efficiencies and business models. The pivot to digital
provides a look into the future of education, commerce, and work that
is both necessary and compelling. Betting on the sustained growth
of technologies, the Philippine government hopes to emphasize
digitalization in its development plans (Diop et al. 2020).
Although taxation of the digital economy has been on the
government’s agenda even before the pandemic, the cost of the pandemic
response as well as the need to finance recovery programs will drive
an even greater need for revenue generation. The taxation of digital
transactions offers a visible and readily available source of revenue.
Moreover, it is also tied to the issues of development and equity. Recent
developments have caused some concern over the growing power of
the tech sector and the negative externalities arising from its growth,
such as privacy erosion, information distortion, and public discourse
polarization. Such realities are relevant to users or creators in the
Philippines, who are often among the most engaged, in driving the value
and network effects for online stakeholders in developed economies.
For any given digital transaction, revenue flows from users
to intermediaries (platforms, payment systems) to beneficiaries
(manufacturers, intellectual property rights owners) and other supporting
participants (logistics companies and drivers). However, national tax
systems are straining to capture revenue from such businesses. After
all, digital businesses are characterized by their complex transactions,
absence of physical presence, and strong dependence on intangible assets.
This paper tackles the digital taxation problem in five parts. The
next section (Section 2) is a comprehensive review of the literature
regarding the taxation of the digital economy as well as the digital tax

1
Rethinking Taxation in the Digital Economy

solutions put forth in other jurisdictions, which may be considered

for the Philippines. Sections 3 and 4 explain this study’s research
methodology and data collection process as well as present a gap analysis
of the Philippines’ current tax regime for digital transactions. These gaps
have been identified based on the tax regimes’ ability to recognize
and capture the flow of revenue from key online transactions. Finally,
Section 5 concludes with recommendations for developing and
implementing a tax policy framework for the digital economy.

Review of Related Literature

Overview of the problem

Taxation of the digital economy1 is a hard problem, particularly because
tax jurisdiction has traditionally been based on physical presence2—either
of the entity being taxed, or some component of the transaction itself
(Kingson 1996). For example, a common principle in bilateral tax treaties
is that one is considered to have earned his income in the place where one
is physically present (thus, taxation rights are allocated based on physical
location). Legal residence, usually defined in terms of length of regularity
of stay in a jurisdiction, often serves as an index for physical presence.
In the case of a corporation, a legal entity without a physical body that
can be present in a jurisdiction is nevertheless deemed—through legal
fiction—to have a physical presence (based on legal criteria of connection
or nexus to the jurisdiction).
The emphasis on physical presence is not just based on
long-standing principles (such as the territoriality principle of law) or
due process (i.e., the power to compel based on the notice served depends
on the actual ability to reach and apprehend a legal subject). For most
states, physical presence enables meaningful exercise of jurisdiction for
tax purposes. The physical presence of the taxable entity or its agent
enables registration and identification, which then makes surveillance,
actual collection of the tax due, and recourse possible in the event

1
Digital economy is defined as “the global network of economic and social activities that are
enabled by platforms such as the internet, mobile and sensor networks” (Li 2017, pp.489–490). For
a brief, interesting survey on social and economic aspects of the digital economy, see Tirole (2016).
2
Legal scholars have long recognized the growing crisis and the inevitable need for reform (see
Kingson 1996).

2
 Review of Related Literature

of noncompliance. On the other hand, the digital economy’s unique

attributes, such as scalable operations without physical presence and
reliance on intangible assets,3 pose challenges to the current tax regime.
New technologies facilitate tax avoidance through profit shifting to
low-tax jurisdictions, while traditional tax rules based on physical
presence struggle to address digital activities.
Building upon an earlier work from the Philippine Institute for
Development Studies, this study investigates the problem of taxation for
the digital economy. Cuenca (2021) provides an extensive overview of the
foundational components of the problem: (a) a definition of the digital
economy’s scope to determine the activities and participants subject to
taxation, (b) the organization of the digital economy’s participants into
clusters of related businesses in a value chain, and (c) policy challenges
encountered in constructing a responsive legal response. Although
earlier works provided initial coverage of possible legal responses—such
as the Bureau of Internal Revenue’s (BIR) interpretative issuances and
draft bills as well as the Organisation for Economic Co-operation and
Development’s (OECD) project on digital taxation—the task of analyzing
the content and structure of these proposals and how they may address
gaps in the existing tax policy is left to future studies. From this precedent,
the study will delve into mechanisms of the law that can apply to the
taxation of digital transactions, their limitations, and possible reform
(Cuenca 2021).
At present, taxation of cross-border transactions is based on a
network of bilateral treaties. Embedded into these treaties, however,
are rules and concepts that have often become irrelevant in the digital
business world. Digital business models provide opportunities to
structure fiscal activities and make them more tax efficient (often at the
cost of lowering tax bases in some countries) (OECD 2015a).
A digital service or product may not have a physical presence in a
certain country, although its customers are present, and the revenues are
generated in the said country (“economic nexus”). The digital business
can distribute its assets across multiple jurisdictions and structure its

3
According to Huws (2014, cited in Medus 2017), “Digital business is more dependent on intellectual
property for creating value—the use of big data collected, diffused, stored, and analyzed—than
traditional brick-and-mortar business. Monetization of big data plays a key role, and value creation
no longer corresponds to the classic schemes.”

3
Rethinking Taxation in the Digital Economy

activities in a fragmented manner to enable tax-optimized location of

profits, use treaty shopping to avoid permanent establishment status, and
attribute the main part of profits to favorable jurisdictions (Medus 2017).
Even with a physical nexus,4 the digital business does not have a presence
that can make enforcement meaningful.
The digital business can operate extensively within a country but
is required only a minimal footprint (e.g., a data center operated by a
skeleton staff of engineers). While the government can move against the
assets in-country (e.g., the servers and network equipment in the data
center), these assets are often commodified and represent only a fraction
of the value held by the business. Most of the actual value held by the
company would be intangible (i.e., the intellectual property in software
and algorithms as well as the data on users and transactions that have
been encoded and processed by the company). Seizing the machines
that house the data will not give the government both legal and
practical means to extract this value. The problem becomes even more
difficult when not only the medium of transaction but also key components
such as (a) the currency being used as a medium of exchange, along with
entities and intermediaries that enable payment and settlement; and
(b) the goods and services (in the case of digital goods, cloud services,
and the delivery of digital content) are virtualized.

Legal principles
A critical aspect of the problem springs from the practices of multinational
entities that operate digital businesses. Theirs are legal but abusive uses
of international tax loopholes that involve the configuration of corporate
structures (usually across tax borders through the use of controlled
foreign corporations) and their transactions to minimize tax impact
(Yang et al. 2019), such as:
1. Moving the tax domicile to a country with a more favorable tax
rate (corporate inversion);
2. Attributing otherwise taxable activities to a foreign corporation
so that their taxable income will be deemed outside the
jurisdiction (i.e., as foreign-sourced income);

4
The physical nexus refers to a series of factors, based on the physical presence in the taxing
jurisdiction, of some element of the transaction or business being taxed. This could include hiring
workers, leasing property, and delivering goods within the country.

4
 Review of Related Literature

3. Using intracompany transactions (e.g., transfer pricing

for resources, payment of service fees, and loans below
market interest rates) as a mechanism to shift income to a
nontaxable entity.

Globalization allows multinational companies to conduct their

business in multiple jurisdictions, encouraging and facilitating trade and
providing a source of government tax revenues. However, the conduct
of business activities across multiple jurisdictions meant that they could
be subject to “double taxation” (i.e., when more than one country levies
a tax on the same stream of revenue from a single taxpayer, discouraging
international trade and eroding the government’s revenue sources)
(US Tax System 1991).
Double taxation arises when one country imposes tax based on
the locus of economic activity, while another jurisdiction also imposes
tax based on residence (or some other legal criteria) of the taxpayer.
A primary mechanism where bilateral treaties address the double
taxation issue is through the concept of “permanent establishment”—a
concept developed during a time when every business was necessarily
the “brick-and-mortar” type and developed long before the evolution
of the internet and e-commerce. A permanent establishment is universally
defined as “a fixed place of business through which the business of
an enterprise is wholly or partly carried on” (US Tax System 1991). A
corporation’s income and profits will only be taxed in the country or
countries where the corporation maintains a permanent establishment.
Since digital corporations today do not maintain a permanent
establishment or physical presence, they are able to generate profits in
more than one country but avoid paying taxes in one or more of those
countries. In other words, a country often does not have the requisite
jurisdiction to impose taxes on internet-based corporations because a
website or internet server is not categorically a “fixed place of business”.
To address the issue of double taxation and encourage
cross-border transactions, governments enter into bilateral tax treaties
providing relief for international businesses in the form of foreign tax
credits, exemptions, and deductions. While tax treaties may be an initial
solution for two countries, systemwide issues may continue to persist. It
should be noted that these treaties were developed amid a backdrop of

5
Rethinking Taxation in the Digital Economy

states defining taxable income inconsistently. For instance, while some

countries adopted a territorial tax system (i.e., tax is imposed solely on
the income derived within its borders), other countries such as the US
adopted a worldwide tax system, where tax is imposed on citizens and
residents regardless of where the income was derived.
The state-to-state inconsistency and lack of an overarching
international regime for cross-border transactions have allowed
multinational enterprises (MNEs) to exploit the divergence in
tax systems to shift their profits from one country to another
then classify those profits as foreign-sourced income. As a result,
corporations take advantage of the relief mechanisms put in place to
mitigate double taxation of foreign-sourced income and reduce overall
tax liabilities.
Many of these MNE practices are subsumed under the concept of
“base erosion and profit shifting” (BEPS)5—an artifact of globalization and
the tension between the state’s taxation power and the need to encourage
trade and investment. The BEPS concept consists of (a) the erosion of a
corporation’s tax base (a determinant of tax liability) and (b) profit shifting.
Profit shifting occurs when corporations use sophisticated tax planning
schemes to transfer income earned from one country to another with
little to no corporate income tax. BEPS is technically legal but has severe
consequences for tax administrations worldwide (Lamers et al. 2014).
The problem of BEPS has long been present, but the features of
the digital economy have exacerbated risks and enabled “structures that
shift profits to entities that escape taxation or are taxed at only very
low rates” (Kang and Salinas 2021, p.2). The shift to digital platforms
permits MNEs (usually residents in a developed country) to fully operate
in developing countries where they do not have a physical presence.
Furthermore, a confluence of factors can allow MNEs to achieve rapid
growth in economic power and incentivize jurisdictions to engage in a
race-to-the-bottom competition that would erode their tax base. In the
absence of a comprehensive, multilateral treaty that will allocate taxing

5
According to Beaudoin (2020, p.129), “BEPS occurs when multinational corporations take
advantage of disconnected international tax laws in order to shift income and profits to low-to-no
tax jurisdictions, thus reducing overall tax liability.”

6
 Review of Related Literature

authority for cross-border transactions among states, multinational

entities continue arbitrage of the fractured international tax system to
minimize, if not totally avoid, tax exposure.

Proposed solutions

The OECD’s two-pillar solution

Over 135 countries have joined the OECD’s “two-pillar solution”,
intending to ensure that MNEs pay a fair share of taxes wherever they
operate. Pillar One involves the sharing of taxing rights through revised
profit allocation and nexus rules. This will reallocate taxing rights over
MNEs from their home countries to markets where they have business
activities and earn profits, regardless of whether they have a physical
presence in such markets. This prong of the OECD project hopes to
resolve the following questions: What constitutes business presence even
in activities without physical presence? Where should tax be paid and on
what basis? What portions of profits should be taxed in the jurisdictions
where customers/users are located (OECD 2015b)? Under the latest version
of the proposal, there will be (1) a formula for the allocation of “above
normal” profits to market countries, (2) a fixed taxable return on routine
marketing and distribution activities, (3) new nexus rules based on
revenue models, and (4) mandatory rules for binding dispute resolution.
Pillar Two, on the other hand, involves the enactment of a global
anti-base erosion mechanism. This seeks to put a floor on competition
over corporate income tax by introducing a global minimum corporate
tax rate of 15 percent that countries can use to protect their tax bases.
This aims to stop the shifting of profits to low or no-tax jurisdictions
facilitated by new technologies, ensuring that a minimum tax rate is paid
by MNEs and leveling the playing field between traditional and digital
companies (OECD 2015b).
An economic impact analysis of the combined effect of the two-pillar
solution (OECD 2020) showed that up to 4 percent of global corporate
income tax revenues, or USD 100 billion of revenue gains annually can
result from implementing the global minimum tax under Pillar Two.
The USD 100 billion can be redistributed to market jurisdictions through
Pillar One, which aims for a fairer international tax framework.

7
Rethinking Taxation in the Digital Economy

Issues with the OECD proposal

The two-pillar approach requires broad support (not only in terms of the
principled agreement but also of actual monitoring) deployed through
a multilateral treaty—which means that many countries will need to
surrender their sovereign power to tax to prevent double taxation.
Nations, such as the US, are concerned about mandatory departures
from arm’s-length transfer pricing and taxable nexus standards, which
may be addressed through a safe harbor option6 that allows companies
to be taxed under existing tax rules only.7
January 2020 marked the start of negotiations on a final agreement
for Pillar One, which would consider the US safe harbor proposal
and the withdrawal of unilateral digital taxation measures. However,
negotiations have stalled based on US resistance even to interim,
phased-in versions of the OECD framework, going so far as threatening
to impose countermeasures against unilateral efforts to tax. This
reaction may be explained by the fact that a disproportionate amount of
multinational entities, including those that dominate the online space,
are found in the US.
To be factored in are some of OECD’s structural limitations: It is
seen as representing only developed countries over the smaller market
countries.8 The OECD also only writes recommendatory soft law, and
adoption is based on member states’ discretion. A far-reaching tax treaty
might also run against the OECD’s prior commitment to free trade
and the free movement of services and goods. Finally, it has opposed

6
A safe harbor is a legal provision that seeks to protect persons from certain types of legal liability.
In this context, the US may enact legislation that includes provision to mitigate the effects of
foreign jurisdictions taxing US-based companies. An example of a safe harbor in the context of
US copyright law is the provision in the Digital Millennium Copyright Act, which applies to internet
service providers (ISPs) and online platforms. The safe harbor provision protects these entities from
copyright infringement liability for user-generated content posted on their platforms, provided
they meet certain conditions, such as promptly removing infringing content upon notification
from the copyright owner. In the context of cross-border taxation, a safe harbor that the US can
offer its resident companies could include simplified reporting, or tax credits for digital taxes paid
to other jurisdictions.
7
Based on a letter sent by US Treasury Secretary Steven Mnuchin to OECD Secretary-General
José Ángel Gurría on December 3, 2019. [Link]
TreasuryLettertoOECD%[Link] (accessed on December 14, 2022).
8
The OECD does not represent the interests of small market countries, including its smaller
European members, and could do more to make rules administrable for them (Mason 2020).

8
 Review of Related Literature

withholding tax regimes, which makes tax enforcement more difficult,

especially on nonresident entities (Spencer 2020a, 2020b).
Although efforts seemed to have also stalled due to the pandemic
(with the US and the European Union (EU) proceeding with unilateral
digital tax efforts), the OECD remains committed to proceed with
consultations on its proposals (OECD 2020).

European Union approach

The European Commission’s proposal is premised on its acceptance
that the current international system is no longer fit for the purpose of a
globalized, digital economy; that is, existing tax rules fail to capture digital
service business models that can profit even without a physical presence.
“In the digital economy, value is often created from a combination of
algorithms, user data, sales functions, and knowledge. For example,
a user contributes to value creation by sharing his/her preferences
(e.g., liking a page) on a social media platform. This data will later be used
and monetized for targeted advertising. Profits are not necessarily taxed
in the country of the user (and viewer of the advertisement) but rather,
in the country where the advertising algorithms were developed. This
means that the user contribution to the profits is not taken into account
when the company is taxed” (European Commission 2018, par.5).
Under the proposed rules, an EU member-state’s power to tax
digital transactions will not require the physical presence of the business.
It does not even require a direct flow of monetary value (e.g., through
users who buy the products and services) but aims to capture the
flow of value from users instead (such as the data and the attention they
provide). The new digital tax regimes are composed of two proposals.
Proposal 1, the preferred long-term solution, is to reform the
corporate tax regime where profits are registered and taxed based
on significant interaction with users of the taxing jurisdiction. This
hinges on retrofitting the concept of permanent establishment for
the digital age through a digital presence nexus. Under this concept,
profits generated within any EU member-state can be taxed regardless
of physical presence based on the following criteria:
1. Profits exceed EUR 7 million in any EU member-state within
a tax year;
2. Has more than 100,000 users in a member-state during the tax
year; or
9
Rethinking Taxation in the Digital Economy

3. Over 3,000 business contracts for digital services are created

between the company and business users within a tax year
(European Commission 2018).

Proposal 2 of the EU reform package is an interim tax on key

digital activities that currently escape taxation from the EU. This interim
measure, however, was not passed in time to head off the development
of uncoordinated unilateral measures at the national level. For instance:
a. France passed a digital service tax legislation on July 24, 2019.
France imposes a 3 percent tax on gross revenues derived
from digital activities where French citizens have contributed
to value creation. The law also taxes intermediary services
(i.e., those that enable users to find and interact with each other)
and advertising services based on user data (i.e., services that
place targeted advertising messages based on digital interface
users’ data). Other related services include purchase, storage,
monitoring and analysis, and management and transmission
of user data for the abovementioned purposes.
b. The UK passed a similar measure effective April 1, 2020.
This measure imposes a 2 percent tax on annual worldwide
revenues above EUR 500 million (if EUR 25 million of the
amount is attributable to UK users). The law applies to social
media services, search engines, and online marketplaces
accessible to users in the UK, as well as ancillary services.

Despite the passage of these unilateral measures, there is renewed

pressure to develop an EU-wide regime for digital services tax (DST)
because (a) there are concerns that the OECD negotiations to reform
the global tax system would not succeed and (b) an EU-wide digital
tax would be better than multiple national digital services taxes for tax
treaties, business compliance, and international leverage. Among the
alternative tax regimes being considered are: (a) a corporate income
tax top-up to be applied to all companies conducting specific digital
activities in the EU, (b) a tax on revenues from specific digital activities
conducted in the EU, and (c) a tax on digital business-to-business
transactions conducted in the EU (Lamer 2021).

10
 Review of Related Literature

Developments in the US
The US has unequivocally stated its position against unilateral
measures—specifically France’s DST—even going as far as threatening
to take retaliatory measures against it.9 Much of the messaging from
Washington expresses concerns of discrimination against the US
since the tax measures disproportionately impact US companies,
which currently dominate the sector. Taxing these entities will have
an impact on domestic job creation and economic development. The
US Department of State maintains that digital companies are not
different from traditional ones and that their transactions should not
be taxed differently. Although it supports a review of the permanent
establishment rule, the US is concerned with the legal and practical
ramifications of building a “two-tiered” tax system—one for traditional
companies and another for digital companies.
There is also a concern that the EU digital taxation regime may
provide a disincentive to digitization and economic growth. A turnover
tax such as the one proposed by the EU does not take sufficient account
of the nature of the transactions taxed (i.e., these transactions will be
taxed regardless of whether or not they are profitable) and will have
distortive effects that discourage the adoption of digital technology.10
Furthermore, the EU measures will reintroduce the problem of double
taxation for digital companies since their revenue will first be taxed
as digital services based on the EU criteria, before being taxed as
income upon repatriation to the digital company’s country of residence
(Beaudoin 2020).
Although the US has been reluctant to move ahead with digital
taxation at the international level, it has already made some progress
in reevaluating what is considered a taxable nexus. In the South
Dakota v. Wayfair (2017) case, the US Supreme Court departed from
the doctrine that required state businesses to have an actual physical

9
In Jopson et al. (2018), discussing the EU's digital services tax and the US response
10
Beaudoin (2020) notes that many companies, even if they technically do not maintain a “digital
business model” may inadvertently fall within the scope of the digital tax if they heavily rely on
digital services to interact with consumers and facilitate purchases. In today's society, it is becoming
more common for traditional businesses to use digital platforms to conduct and advertise services.
The growth of digital economy has had an unquestionable positive impact on economic growth,
but it may regress if companies conducting business in Europe cease to use digital platforms in fear
of losing profits at the hands of the digital service tax.

11
Rethinking Taxation in the Digital Economy

presence in the state imposing domestic sales taxes.11 Following the South
Dakota v. Wayfair decision, state governments can now require online
retailers to collect taxes, even if the latter do not have a physical presence.
Although limited only to sales tax for interstate online transactions,
the court decision was an acceptance of the notion that the permanent
establishment rule used for taxing multinational corporations is outdated,
ineffective, and out of touch with economic reality. The Supreme Court
deemed the physical presence requirement of previous cases (i.e., Quill
Corp. v. North Dakota 1992) to be “unsound and incorrect”. According
to Justice Kennedy, “The internet’s prevalence and power have changed
the dynamics of the national economy” (South Dakota v. Wayfair 2018).
In the wake of the decision, the majority of the states have taken
the lead in redefining rules on nexus and tax jurisdiction, approximating
a DST. Thus, if a company without a physical presence sells taxable goods
and services in a particular state, it can be subject to the state’s sales tax
rules and obliged to collect and remit such tax. However, this regime
presents an issue of fairness and enforceability, especially regarding
companies that have no physical presence and no assets that the state can
seize in case of noncompliance (Kirkell and Bell-Jacobs 2018). Ineffective
enforcement would disadvantage domestic companies with online
offerings, as they would disproportionately bear the tax burden. The tax
gap might cause them to leave the jurisdiction, causing further erosion
of the state’s tax revenue. Commentators suggest that to level the playing
field, the state must ensure the collection of all taxable sales within the
state. This underscores the need not only for laws but also for enforcement
strategies in case of noncompliance (Kirkell and Bell-Jacobs 2018).
The US Federal Government is also working within the existing
tax framework of Congress but aims to tax online transactions
through administrative interpretation. That is, it aims to ultimately
tax revenues from cloud transactions as well as the consumption of
digital content where users reside. Under the proposed 26 Code of Federal
Regulations § 1.861-18 (“Classification of transactions involving computer
programs”), the US is also expanding its taxing authority over transactions
involving computer programs by covering transfers of digital content,
which is defined as “a computer program or any other content in digital

11
138 S. Ct. 2080; 201 L. Ed. 2d 403 (2018)

12
 Review of Related Literature

format that is either protected by copyright law or no longer protected

by copyright law solely due to the passage of time, whether or not the
content is transferred in a physical medium”. On the other hand, 26 Code
of Federal Regulations § 1.861-19 covers cloud computing transactions,
typically described as (a) Software as a Service (SaaS); (b) Platform as a
Service (PaaS); and (c) Infrastructure as a Service (IaaS).
A cloud transaction is defined as a transaction through which a
person obtains on-demand network access to computer hardware, digital
content (as defined in Prop. Treas. Reg. § 1.861-18[A3]), or other similar
resources, other than on-demand network access that is de minimis. It
does not include network access to download digital content for storage
and use on a person’s computer. Neither does it include a mere download
or other electronic transfer of digital content for storage and use on a
person’s computer. Under the interpretive issuance, cloud transactions
are characterized as access to or use of property, instead of the sale,
exchange, or license of property. Transactions are therefore legally
classified as a lease of property or a provision of services.
No sourcing rules are provided, so the fallback for taxpayers is the
traditional sourcing rules. Services can be deemed to take place where
(a) the taxpayer’s personnel are located, (b) the servers are located,
(c) the customers are located, or (d) any combination of the above. This
is problematic since the provision of any component of the service
(programming, design, database, network) can be distributed (Kang and
Salinas 2021). For US corporations, their worldwide income is subject
to federal tax; thus, whether or not the federal taxable income includes
service income from foreign customers may not be meaningful for state
income tax purposes. However, foreign corporations with a US trade
or business may be significantly affected by how a cloud transaction is
sourced for state income tax purposes.
Although not specifically targeted toward digital transactions, the
Base Erosion Anti-Abuse Tax (BEAT) was passed by the US Congress
to address the global income of US-based companies and US-source
income of non-US-based companies. The BEAT regime was established
to protect the US tax base from reduction via outbound payments.
It targets “base erosion payments”, which include any amount paid or
accrued by a corporation to a foreign person who is a related party and
generally includes, among other deductible payments, interest, royalties,

13
Rethinking Taxation in the Digital Economy

and service payments. These base erosion payments have been deducted
from the ordinary income, resulting in tax savings. The BEAT attempts
to deny this advantage; that is, a BEAT amount is assessed in addition to
the regular tax amount of the US company, regardless of any mismatch
with the rules concerning jurisdiction to tax based on source or
residency in effect in the country where the foreign payee is considered
a tax resident. In doing so, the related parties are potentially subject to
double taxation on the same item of income (Ouyang and Yang 2019).

The United Nations proposals

The United Nations (UN) has proposed a digital tax regime that
diverges significantly from the OECD approach. The content of
the UN proposal is shaped by concerns over the OECD approach,
such as (a) the complexity of the OECD proposal; (b) the problems
developing countries could encounter regarding their legal system’s
implementation, administration, and coherence; (c) their ability to
obtain the information needed to enforce the OECD approach; and
(d) their effective engagement in the new administrative processes that
will be required to ensure a multilateral agreement on amounts to be
allocated (Spencer 2020a, 2020b).
The UN proposal would impose a direct income tax on automated
digital service providers. This obligation can be charged as a withholding
tax on (a) gross income (with rates subject to a later agreement by the
parties) or (b) net income based on a formula for apportioning between
the state of residence and the market state. The proposal allows automated
digital service providers to select whether gross or net income will be the
basis for assessment. The term “income from automated digital services”
is defined in Article 12B (4) as “any payment in consideration for any
service provided on the internet or an electronic network requiring
minimal human involvement from the service provider”. However, this
term does not include payments qualifying as “fees for technical services”
under Article 12A (United Nations n.d.).

Work from developing economies

The African Tax Administration Forum has expressed that Africa cannot
afford to wait for the OECD proposals to be finalized and implemented.

14
 Review of Related Literature

Its economies have been decimated by COVID-19, which coincided

with record revenues from digital businesses that have abandoned their
physical presence in favor of purely digital presence (Spencer 2021). The
model law it proposes takes a DST-based approach: It attributes digital
services revenue and, therefore, the right to impose a digital services
tax to a country where the users are located. Although the projected
revenue is not large, the measure would boost public perception of the
fairness of the taxation system by subjecting large multinationals to
the same taxes paid by local businesses with a physical presence in the
jurisdiction (Spencer 2021). The tax base would be between 1 and 3 percent
of gross turnover and could apply to firms operating in loss, or with
low-profit margins.
To offset any possibility of the DST hampering the growth of
the digital sector in Africa (particularly startups and small and medium
enterprises), the tax measure features robust de minimis thresholds.
Section 8 of the model law considers both (a) a worldwide threshold,
based on a company’s worldwide turnover, in the chargeable period; and
(b) a country-specific threshold, or the total amount of digital services
revenue generated in a country by the company in the chargeable period.
Under the model law’s attribution to the source, the country is
generally determined by the presence of the digital businesses’ users. In
Part 5 of the model law, a user means any person who uses, views, or
otherwise engages with an online platform, and including:
a. persons involved in transactions for the rent or other use of
real property through an online accommodation marketplace,
such as individuals providing the property for rent or use and
those renting or using the property;
b. persons involved in transactions for private vehicle hire
services through an online private vehicle hiring marketplace,
like drivers and passengers;
c. persons purchasing or selling any goods or services, including
digital content, through an online marketplace; and
d. persons purchasing or subscribing to digital content services,
online gaming services, or cloud computing services.

15
Rethinking Taxation in the Digital Economy

Part 6 enumerates rules for determining the location of the user,

such as:

For advertising services

a. Information regarding the ordinary location of the user is
collected by the online platform over the course of the user’s
engagement with the online platform (i.e., the user profile);
b. If there is no user profile data, the geolocation associated
with the device at the time the user engaged on the online
platform; and
c. If there is no user profile or geolocation data, the user’s IP
address is associated with the device at the time the user was
engaged on the online platform.

For online marketplace services

a. If the user purchases physical goods and services, the location
is deemed to be the user’s physical delivery address;
b. In all other cases, the location is the geolocation associated
with the device at the time of entering the relevant transaction
through the online platform; and
c. If there is no geolocation data, the location is deemed to be
based on the user’s IP address associated at the time of entering
the relevant transaction through the online platform.

For online marketplace services

a. The location of the user who sells goods is deemed to be the
registered address associated with the account through which
the transaction took place;
b. If (a) is not available, then the location is the billing address
associated with the account through which the transaction
took place;
c. If (a) or (b) are not available, the location is the geolocation
associated with the device at the time of entering a transaction
through the online platform;
d. If (a) (b), and (c) are not available, the location is the user’s IP
address associated with the device at the time of entering the
relevant transaction through the online platform.

16
 Review of Related Literature

For digital content services, online gaming services, and cloud computing services
a. If the user is a business, the location is the registered business
address of the user receiving the services;
b. If the user is a person other than a business, the location is
based on the billing address of the user receiving the services;
c. If (a) or (b) are not available, the location of the user’s bank
or financial account used to make payment for the services
will suffice;
d. If (a), (b), or (c) are not available, the location is the geolocation
associated with the device at the time of purchasing the service;
e. If (a), (b), (c), and (d) are not available, then refer to the user’s
IP address associated with the device at the time of purchasing
the service.

Developments in the ASEAN

Member countries of the Association of Southeast Asian Nations (ASEAN)
are increasingly recognizing the value of digital commerce and are taking
unilateral steps to capture revenue. For instance, Singapore requires
foreign digital service providers to collect and remit (on behalf of their
users) a goods and services tax (GST) of 7 percent and participate in an
Overseas Vendors Registration regime (Inland Revenue Authority of
Singapore n.d.). These obligations are applicable to foreign suppliers
of digital services with a global turnover of more than SGD 1,000,000
and whose sales of digital services to consumers in Singapore exceed
SGD 100,000. Other ASEAN countries such as Malaysia (Yeoh and
Ong 2021), Indonesia (Conventus Law 2021), and Thailand ([Link] 2021)
have followed a similar track, imposing a tax on the ultimate consumers
of digital services and requiring nonresident digital service providers
to register as a way to commit to their obligation to collect from users
and remit the taxes to the government.
In the Philippines, proposed legislation likewise follows the
Singaporean model: The recommended tax on digital services does not
reach into the income of nonresident providers, but rather deputizes
them to impose an additional tax burden on their users.
Unilateral responses, such as those taken by the US, France (which
is a representative of the EU), the UK, and Singapore reflect both
their relative standing in the digital economy’s value chain and their

17
Rethinking Taxation in the Digital Economy

economic/trade policies. The US, as the state of residence of many

leading digital commerce companies, adopts a tax policy that allows it
to maximize revenue collection from the companies while protecting
them from unilateral taxation by other countries.
Countries such as the UK, France, and Singapore may not have
the top participants in the digital commerce ecosystem, but their
developed network infrastructure, talent pool, and location have made
them attractive as regional hubs. They have also developed their tech
industries to provide vital inputs for those in dominant sectors such as
software development, finance, and management systems. The unilateral
tax policy imposed by these countries reflects their market power as well
as their interest in ensuring parity in the tax burden between resident
and nonresident companies.
On the other hand, the African response reflects its status as a
potentially vast (and largely untapped) market for digital goods and
services. The African model treaty considers any income from users
located in Africa as taxable.
The Philippines can be characterized as occupying a transitional
phase between these models. It is an emerging market with a young,
technologically savvy population. Driven by the environment it had to
deal with during the pandemic, the local digital commerce market is now
experiencing growth, and the government is anchoring its economic
recovery on the growth of the online market. The country’s relatively
poor network infrastructure, however, prevents it from scaling its own
tech sector or becoming a regional hub for dominant providers. Such a
limitation has to be addressed given that the Philippines still possesses a
competitive advantage in technical support and aspires to move up the
value chain.

Taxation of digital commerce in the Philippines

Existing tax law

The baseline tax law currently being applied in the Philippines is
Republic Act (RA) 8424, which was passed when the digital economy
was still nonexistent in the country. It has no definition of digital
transactions nor any process for recognizing and collecting revenue
from online transactions. It still uses the traditional model, where

18
 Review of Related Literature

citizens and domestic corporations are taxed based on their income

worldwide (nationality principle), while nonresident citizens and foreign
corporations are taxed only for income sourced in the Philippines
(territoriality principle).
The country’s National Internal Revenue Code (NIRC), like most
tax laws, enshrines the above principles. In RA 8424,12 a resident citizen
of the Philippines must pay tax for income earned from both local and
foreign sources (Sec. 23[A]). A nonresident Filipino citizen, on the
other hand, will have taxable income for sources within the Philippines
(Sec. 23[B]). Foreigners living in the Philippines, whether resident or not,
are taxable only for income earned from sources within the Philippines
(Sec. 23[D]). Similar rules are applied to corporations as well. A domestic
corporation, like a resident citizen, will be liable for taxes on income
derived from within and outside the Philippines (Sec. 23[E]). Finally,
a foreign corporation’s taxable income includes only those earned
from the Philippines (Sec. 23[F]). It should also be noted that the
organization of the state’s tax apparatus reflects the paradigm built
around physical location: Tax administration is spread across revenue
districts with geographical assignments (Executive Order 132).
The regime can be enforced well for income from brick-and-mortar
businesses, even when a foreigner is a counterparty to the transaction.
A nonresident foreigner, such as a tourist, can purchase goods in a
local store. The local store records the transaction as part of its income,
which is reflected in its tax return. On the other hand, the store is
also deputized to impose a value-added tax (VAT) on its products and
charge it to consumers (NIRC Sec. 105 or Revenue Regulation 16–2005).
These obligations are enforced through tax administration measures
that are tied to the physical location of the subject of taxation or its
place of business, its assets, and information. Thus, in the case of the
hypothetical local store:
a. Tax registration. The local store is required to register its
business with the BIR, and the registration certificate (along
with its annual renewal) is a precondition for the issuance of
a business permit (NIRC Sec. 236). Both the BIR registration
and the business permit documents must be prominently

12
An act amending the National Internal Revenue Code.

19
Rethinking Taxation in the Digital Economy

displayed in the place of business (Revenue Regulation 7–2012,

Sec. 7[5]).
b. Point of sales permit. The store is required to apply for a
permit to use a Cash Register Machine or Point of Sale System.
As part of the prerequisite, the business must submit technical
information on the machine so that the BIR can extract and
verify transaction information (NIRC Sec. 237).
c. Receipts printing and issuance. Any business that issues
receipts and invoices is required to apply for a permit with
the BIR and have the receipts and invoices printed through
accredited printers only (NIRC 238).
d. Physical mapping and inspection. Through regular tax
mapping, the BIR updates its awareness of the number and
locations of businesses within an area and their compliance
with their tax obligations. In this process, the mapped store is
tagged as “Tax Mapped”, and its book of accounts is inspected
(Revenue Memorandum Order 31-2003).
e. Physical apprehension of subjects. If the store fails to meet
its tax obligations, the BIR can resort to a series of actions that
proceed against the physical aspects of the store or its owners:
It can forcibly close the place of business, seize its stock in trade
and other assets (NIRC Sec. 115), or criminally charge its owner
(which can lead to the latter’s physical arrest and detention)
(NIRC Sec. 254).

The same system is at work on businesses offering services, even

if the counterparty is a foreigner. A local business hiring a foreign
consultant will be subject to all the abovementioned monitoring and
enforcement actions (NIRC Sec. 25 [A.1]). In addition, the business
is deputized as a withholding agent of the foreigner’s income. Even if
the foreigner is outside of the BIR’s ability to locate and apprehend,
his employer and locally sourced income remain under BIR’s purview.
The BIR has tried to modernize this tax regime through
administrative interpretations that cover specific digital transactions,
such as the Revenue Memorandum Circular (RMC) 44-2005.13

13
On Taxation of Payments for Software. RMC 44-05, September 1, 2005.

20
 Review of Related Literature

Under the issuance, the following transactions shall be subject to a

12 percent VAT:
a. Royalty payments for the use of a copyright over software;
b. Payments made to resellers/distributors or retailers who are
engaged in the trade or business of distributing or selling
software; and
c. Payments for services rendered in the Philippines in connection
with purchased software.

If the payments are made to a nonresident licensor, reseller, or

distributor, the person in control of the payment shall be required to
withhold the VAT for and on behalf of the nonresident licensor. The
licensee may claim the VAT withheld as its input tax upon filing its
VAT return.
Another attempt to tax the digital economy is outlined in
RMC 70-2015, which governs “the tax incidence of the business of land
transportation, particularly transport network companies (TNCs), such as
but not limited to the likes of Uber, GrabTaxi, their partners/suppliers
and similar arrangements”.14 Under this issuance, the BIR differentiates
TNCs and/or partners who are holders of Certificates of Public
Convenience from those who are not. If a TNC or partner holds such
a certificate, they shall be classified as a “common carrier” and therefore
subject to the 3 percent common carriers tax under Section 117 of the
Tax Code. Otherwise, they shall be classified as “land transportation
service contractors” and therefore subject to the 12 percent VAT or
to the 3 percent tax (if the partners with gross receipts not exceeding
PHP 1,919,500 opt not to be VAT-registered).

Recent developments
Taxation of the digital economy has long been on the government’s
agenda. Even for some of its administrators, the NIRC is no longer
fitting for taxation of online transactions.15 Moreover, the pandemic
response and post-pandemic recovery are expected to drive an even
greater need for revenue generation.

14
On Reiterating the Tax Treatment of Certain Persons Engaged in the Business of Land
Transportation, RMC 70-2015, October 29, 2015, p.1.
15
Key informant interview with Atty. Josephine Gomez (Assistant Revenue District Officer, Bureau of
Internal Revenue) September 6, 2022 (“Gomez Interview”). On file with the PIDS.
21
Rethinking Taxation in the Digital Economy

House Bill (HB) 6765 (Digital Economy Taxation Act, which was
filed in May 2020 and still under deliberation in Congress) proposes a
12 percent VAT on (a) digital advertising services (such as those on search
engines and social media platforms); (b) subscription-based services
(including music and video streaming subscriptions); (c) electronic
services; and (d) transactions made on e-commerce platforms.
Aside from suppliers of digital services and e-commerce platforms,
entities in the digital commerce ecosystem called “network orchestrators”
were recognized in the bill. These include ride-hailing companies
(e.g., Grab, Angkas), rental platforms (e.g., Airbnb), and other platforms
linking customers and service providers within a network system
(e.g., payment gateways such as Maya or GCash). These entities will
be required to withhold tax on the income derived by related actors
in the network orchestrator system.
A nonresident who renders digital services or acts as a network
orchestrator and/or as an e-commerce platform will be required to
establish a representative office or resident agent in the Philippines.
For tax purposes, revenues derived from the abovementioned activities
will be considered revenues generated by the representative office or
resident agent.
A more recent measure, HB 7425, has passed its third reading in
Congress and seeks to amend Section 105 of the NIRC by taxing digital
service providers that operate through online platforms. The proposal
imposes a 12 percent VAT on digital transactions in the country. Foreign
corporations selling digital services (e.g., Netflix, Spotify) will have to
pay for and impose VAT on their services. Arguably, the measure does
not propose a new tax or tax rate but merely aims to increase income
tax and VAT compliance by requiring network orchestrators and
e-commerce platforms to withhold those taxes by appointing them as
withholding agents.
According to HB 7425, nonresident digital service providers
with gross sales from the year prior to the implementation of the
impending law above PHP 3 million will be required to register
for VAT. The Department of Finance gave an initial projection of
PHP 10.7 billion in additional revenues every year arising from the
proposed law. Digital services include online licensing of software,

22
 Review of Related Literature

software updates and add-ons, website filters and firewalls, mobile

applications, video games and online games, and webcasts and webinars.
It also includes the provision of digital content (music, files, images,
text, information), online advertising spaces, electronic marketplaces,
search engine services, social networks, database and hosting, and
online training.
HB 4122, filed more recently under the 19th Congress, covers a
similar scope of entities and transactions as HB 7425 and reiterates the
12 percent VAT on digital services. The new bill, however, includes a
requirement for nonresident digital services: the appointment of a
resident corporation as a local tax agent to assist in tax compliance. The
proposed new tax bill follows the unilateral approaches taken by France,
the UK, and Singapore. Its existing tax base is reliant on some physical
nexus: either a resident agent or the resident user who will ultimately bear
the tax burden.
Just like the measures passed by the UK, France, and Singapore,
the proposed law is a unilateral measure. The effectiveness of tax collection
will depend on how the nonresident provider can be incentivized to
cooperate (i.e., whether the cost of cooperation is lower than the benefit
of participating in the local market). Since the nonresident provider
may have no local presence to start with—no local office, no assets, and
all aspects of its business interaction are carried out online—the BIR’s
usual toolset to compel taxpayers would not apply. It cannot enforce
registration or reporting, nor can it exercise visitation rights and inspect
accounts without cooperation from the nonresident provider’s home
jurisdiction. The only recourse is to go straight to the terminal option
and compel local internet service providers (ISPs) to block access to the
provider’s services. To avoid this circumstance, however, users resort
to readily available means of circumventing and routing around ISP
blocking (e.g., through virtual private networks).
While Congress is finalizing a workable digital tax policy, the BIR
has been optimizing the enforcement of the existing tax law through
administrative issuances. Revenue Memorandum Circular 55-2013
subjects online business transactions to the existing tax law and reminds
parties to online transactions of their tax obligations. Although the rule

23
Rethinking Taxation in the Digital Economy

applies to all forms of online transactions under the BIR’s jurisdiction,

the circular specifies tax obligations for the following operators:
1. Online shopping and retailing—refers to those who
engage in direct buying and selling of goods and services
without the use of an intermediary. Online shops of existing
brick-and-mortar businesses or brands that only sell online
fall under this category.
2. Online intermediary services—third parties that serve as
conduits between trading parties and receive commissions for
every transaction. Platforms such as Lazada or Shopee, which
allow businesses to set up online storefronts within their sites,
can be considered online intermediary services.
3. Online advertisement/classified ads—applies to firms whose
business model depends on delivering marketing messages
via the internet to attract customers. Social media sites
(e.g., Facebook/Meta, YouTube) allow communication and
delivery of media for free but rely on monetizing audience
and engagement by serving ads tailored to user behavior
and preferences.
4. Online auctions—similar to online intermediary services
in that they are third-party service providers that enable
transactions between parties. However, closing of a transaction
is based on the highest bidder. Auction platforms can either
receive a commission based on the purchase price or impose a
fixed subscription fee for the use of their technology.

It should be noted that these categories are not necessarily

exclusive. Technology enables the convergence of these revenue models.
For instance, an online auction platform can receive bids but also provide
a “buy now” price for immediate purchase, in which case it would behave
just like an online intermediary service.
An online intermediary service may be considered an online
shopping service if it enables online sellers to put up their storefronts
and sell products on their own accounts. Finally, an online shopping
platform can derive revenue not just from sales but also from leveraging
its traffic and user data to serve ads.
Revenue Memorandum Circular 55-2013 relies on existing laws
for its coverage and mode of tax administration. It is tied to the same
24
 Research Methodology

system of registration and monitoring brick-and-mortar businesses

based on territorial jurisdiction. Thus, businesses involved in the digital
commerce value chain are required to register with the BIR, apply for
authority to print receipts, withhold creditable taxes, and file returns on
their own income.
The memo’s directives draw on the existing tax base and do not
apply to nonresident digital service providers, which are usually the
market leaders that extract more revenue from the local user base.
While these rules may be valid in principle, it is difficult to imagine
how these can be monitored and enforced at scale—even on residents of
the Philippines. The ease in setting up online accounts and storefronts
(often anonymously), with components of the process happening abroad,
presents a significant enforcement challenge to the BIR.
Revenue Memorandum Circular 60-2020 clarifies that the Philippine
tax law applies to all income, whether the transactions are in digital
form. It also reminds all persons earning income through digital means
to ensure that their businesses are registered and tax compliant. The
circular notes that compliance is required not only for e-commerce
platforms and their partner sellers/merchants but also for “stakeholders
involved such as payment gateways, delivery channels, internet service
providers, and other facilitators” (RMC 60-2020). On the other hand,
RMC 97-2021 clarifies the tax obligations of social media influencers.
The circular states that influencers must pay income tax as well
as percentage tax or VAT. The BIR had announced that it has been
investigating the tax compliance of the top 250 “influencers” in the
country (Rivas 2021).

Research Methodology

In the face of a challenge, policymakers are often tasked to respond

through a new policy, usually expressed legally, that would structure
actions or express new preferences. At the very least, the new policy can
adjust the status quo to make situations more acceptable.
The taxation of digital transactions is a challenge that the country’s
policymakers must respond to. As firms and consumers shift more of their
activities online, the existing legal framework for taxation, primarily
developed for “brick-and-mortar” businesses, may fail to capture the

25
Rethinking Taxation in the Digital Economy

value of digital transactions.

While there are many proposals for tax law reform in the digital
age, most are based on models from advanced economies. The literature
is sparse when it comes to changes appropriate for a country with the
Philippine economic profile (i.e., a developing market that emphasizes
service-based industries and a net importer of finished goods).
To evaluate the country’s legal framework for taxing digital
transactions, this study thus performed a gap analysis of the Philippine
tax regime’s applicability to digital transactions. The analysis looked not
only into the current regime’s shortcomings relative to tax models from
the OECD and others but also into the experiences of key stakeholders
with the Philippine tax system.
In studying how the provisions of the law can map onto the value
of digital markets, the author had to first define the market. Defining
the market enabled the analysis to focus on relevant legal provisions for
taxing digital transactions (either by direct reference or by implication),
thus avoiding the need to examine the entire corpus of tax law. The
goal, after all, was to inform a tax policy that captures the growth and
increased purchasing power in such markets, and not to impose new
taxes on “traditional” sectors already subject to tax.
However, “ring-fencing” digital commerce into a neat, singular
definition for the purpose of analysis can be difficult (Cuenca 2021).
There are many incompatible definitions because the concept can be
approached from a variety of perspectives: from resource-based models
that emphasize the use of technologies as the main criteria, to broader
concepts that take into account structural changes to the economy
(Cuenca, citing Bukht and Heeks 2017). Furthermore, as large swathes
of the economy adopt new technology and business processes, defining
the digital economy now extends beyond the core of information and
communications technology (ICT) firms, which are responsible for the
foundational goods and services of the sector. The concept of a “true
digital economy” is now defined as one where business models rely
primarily on digital goods and services, potentially growing to the point
where the economy uses ICT (Cuenca 2021).
Instead of going by an ontologically complete definition of the
digital economy, this study adopted a functional model. It first built on a
model of the digital economy as a value chain involving multiple subsectors

26
and actors16—from the core ICT companies that provide enabling
technologies, to key intermediaries (such as platform providers and
logistics companies), to actors at the endpoint of transactions (Table 1).
The study then identified revenue models embedded within the
value chain. It built on the previous literature on documented revenue
models (see Annex A).
For each revenue model identified, the study constructed a
notional use case of an end-to-end transaction, documenting all the
actors and the flow of value between them. Take as an example the
revenue model adopted by e-commerce platforms based on the sale and
delivery of goods to retail consumers (Table 2). In the scenario where
a user of a business-to-consumer e-commerce platform (e.g., Lazada)
purchases physical goods online, a close inspection of all the necessary and
incidental transactions involved will reveal the network of actors and
transactions in the ICT value chain such as (a) the telecommunications
company providing the user’s internet connectivity; (b) the gateway
used to transmit and settle payment; and (c) the logistics companies
and actors at the endpoint of transactions, such as the drivers responsible
for delivering the goods to the user’s doorstep.
Several flows of value can be mapped based on this use case
alone. Two of these are (a) the service fee paid by the user to the
telecommunications company; and (b) the payment for the goods
processed through the payment gateway, which may have
subcomponents, such as the cost of the goods plus profit due to the
seller, the share of the e-commerce platform, and the transaction fee of
the payment gateway.
As a general rule, taxation usually does not apply to static
aggregations of capital but to flows of value. The payment of money
from employer to employee is a flow subject to income tax (to be paid
by the employee and withheld by the employer). VAT is based on the
sale and consumption of certain goods—a flow of value between the
consumer (who ultimately bears the tax burden) and the manufacturer
or seller of the VATable goods. Even the capital gains tax is not a tax
on capital per se but is computed based on profits realized from the
sale of an asset.

16
The methodology is an extension of Serafica et al.’s (2020) model of markets as value chains.

27
Table 1. Proposed value chain model for digital economy
Functions Infrastructure Platform Design and Promotion Payments Fulfillment
Integration
Activities • Provisioning of • Software • Advertising and • Fund transfer • Inventory and
hardware, software, development marketing campaigns • Settlement warehousing
network resources • Operations (seller • Data analysis • Insuring • Shipping
onboarding, • Tracking
technical support)
Actors • Telcos/ISPs • E-commerce • Advertising/ • “Traditional” payment • Logistics companies -
platform (B2B, marketing/PR firms system cross-border logistics,
• Application/content B2C, C2C) • Search engines • Nontraditional package forwarding
hosting • Enabler firms • Ad networks payment systems - firms, third-party
• Contact center • Research and independent service logistics, on-demand
• analytics firms provider (e.g., Apple delivery firms,
Pay, Paypal) fulfillment service firms
• Remittance • Warehousing
companies companies
• Insurance companies
Suppliers - manufacturers, wholesalers, retailers
Buyers - intermediate buyers, consumers, business buyers
B2B = business-to-business; B2C = business-to-consumer; C2C = consumer-to-consumer; ISPs = internet service providers; PR = public relations
Source: Author’s compilation
 Research Methodology

Table 2. Sample use case for a revenue model (sale and delivery of
physical goods)
Case: A user of an e-commerce platform orders consumer/retail goods
Actions
The user connects to the platform through an internet service provider or
telecommunications company.
After establishing a connection to the internet, the user logs in to the e-commerce
platform.
• The user may need to submit personal information (name, address, payment
information) to the e-commerce platform prior to login.
The user searches for preferred goods.
• The e-commerce platform may also push suggested goods based on the user’s
preferences and prior interactions.
The user selects the consumer/retail goods to be purchased.
• The user may need to compare several product alternatives or sellers of
the goods.
• The user may need to communicate directly with the sellers of the products.
The user employs a payment system to pay for the consumer/retail goods.
• The user can pay by cash on delivery.
• The user can pay through a payment system provided by the
e-commerce platform.
The user receives delivery of the goods through a logistics/delivery company.
• The user may return the goods through a logistics/delivery company.
Source: Author’s compilation

Thus, this study evaluated the extent to which existing tax

laws could capture these value flows. For each flow of value identified
in each use case in a particular revenue model, the study determined:
(a) whether or not the transaction could have an international
component; (b) what is the most appropriate legal characterization of
the flow of value for tax purposes; (c) what are the tax law provisions
most applicable, if any, to the flow of value based on the legal
characterization; and (d) the robustness of the applicable tax law—whether
or not the tax law and the existing tax administration infrastructure
could provide the following modalities of tax jurisdiction:17
a. Attribution to the source of revenue to local jurisdiction;
b. Computation of base and rate;

17
See Annex B for an example of an analysis of one flow of value based on the above use case.

29
Rethinking Taxation in the Digital Economy

c. Surveillance mechanisms (e.g., data submissions, audits); and

d. Enforcement mechanisms in case of delinquency.

The study then analyzed the gaps that render the local tax regime
unable to capture the flows of revenue, and the aspect of the tax
administration that is unresponsive to the digital economy. These gaps
may be organized based on themes in existing literature or based on
critical business models and value chains.

Data Collection and Analysis

Capturing actors and flows of value

The researcher first organized the proposed list of revenue models based
on the following categories:
a. Subscription—The user or consumer pays a recurring fixed
or variable fee at regular intervals in exchange for regular
receipt of goods or services.
b. Pay-as-you-go—The user makes a one-time payment for the
provision of a service, a right, or a tangible good.
c. Ad revenue—The publisher is paid based on the number
of users that are served ads and/or on the latter’s level
of engagement.
d. Financing—The user avails of financial services (such as
fundraising and extension of credit) and pays a fee or interest,
or deposits money from which the platform profits from
the float.
e. Commission—This is usually applicable to multisided
platforms that facilitate transactions for multiple buyers and
sellers. The platform can take a share from all transactions.
f. Gaming/gambling—The user pays a bet, and a payoff is
conditioned on an uncertain outcome (based on luck or skill).

The researcher also noted the variations in each of these revenue

models and the examples for each variation. The subscription revenue
model, for instance, can be applied to media streaming platforms
such as Netflix. Many underlying technologies used by actors in
the value chain also rely on this revenue model. Both end users and

30
 Data Collection and Analysis

intermediaries (i.e., commerce platforms and payment systems) may

use cloud technology as well as basic internet connectivity, which can
be provisioned based on a subscription contract. At the same time,
direct-to-consumer companies can deliver tangible goods such as food,
clothing, or personal care consumables on a subscription basis.
The above revenue models are not mutually exclusive. An actor in
the value chain can adopt multiple revenue models and therefore be the
nexus of multiple flows of value. For example, an e-commerce platform
such as Lazada can:
a. Have a cut from all purchases that were mediated by its
platform (commission);
b. Receive fees for advertising (or preferential placement) of
sellers in its platform (ad revenue);
c. Operate an internal payment system that can extend credit to
its users (financing);
d. Conduct games and giveaways as part of a marketing
campaign (gaming); and
e. Offer recurring delivery of goods and/or services based on a
subscription contract (subscription).

The study found 21 variations of these six revenue models (Table 3),
diverging along factors such as the subject of the underlying contract
(e.g., delivery of a tangible good, license to use a right, provision of
a service), the number and/or typology of actors involved (e.g., the
delivery of tangible goods will require a delivery service), as well
as other contingencies that may be present in the revenue model
(e.g., crowdfunding as an investment will have a different risk model
compared to a loan).
The researcher noted that although there are many ways to
compute the amount payable for transactions under an advertising-based
revenue model (e.g., based on either each instance of product placement
or the number of views), there are no major structural differences
between specific instances that would merit carving out subcategories.
For each revenue model variation, subsets of actors in the
e-commerce value chain are linked to each other by flows of value. In
the “purchase and delivery of tangible goods” revenue model, there is the
end user who initiates the value chain by ordering the goods from the

31
Table 3. Revenue models, implementation-based variations, and examples
Revenue Model Variation on Revenue Model Examples
Subscription Subscription for media content Netflix, Apple TV
Subscription for physical goods Hello Fresh, Cratejoy
Subscription to applications Office 365, Zoho
Provision of technology Azure, AWS
Access to information LexisNexis, Bloomberg
Pay-as-you-go Licensing of media for consumption iTunes, Sony Store
Payment for applications iOS App Store, Google Play Store
Purchase and delivery of tangible goods Lazada, Shopee, Amazon
Provision of services Task Rabbit, ODesk
Rental of property Airbnb, GetAround
Ridesharing Uber, GrabCar
Ad-revenue (No variations) Google, Facebook ad services
Financing Crowdfunding Kickstarter, Indiegogo
Peer-to-peer lending Prosper, LendingClub
Commission App Store iOS App Store, Google Play Store
Payment system PayMaya, GCash
E-commerce platform Lazada, Shopee, Amazon
Service platform Taskus, Amazon Mechanical Turk
Use of assets Rubberdesk, Uber
Gaming Gambling Ignition Casino, E-Sabong
Microtransactions Blizzard
Loot Crates Electronic Arts
Source: Author’s compilation
 Data Collection and Analysis

online seller and sending a payment through a payment systems provider

(such as PayMaya) that can keep the amount in escrow and remit to
the e-commerce platform upon delivery. The e-commerce platform
can then remit to the online seller (after taking its commission). Other
intermediaries may also participate as origins or targets of flows of value:
Technology service providers may provide critical technologies (storage,
computation, and software) for both the e-commerce platform and the
payment systems provider. On the other hand, every actor in the value
chain will subscribe to an internet service provider for basic connectivity.
Table 4 shows how the researcher isolated the usual actors involved
in the transactions for the “purchase and delivery of tangible goods”,
a variation of the pay-as-you-go revenue model.

Table 4. Actors involved in the “purchase and delivery of tangible goods”

revenue model variation
Revenue Model Variation Example Actor
Purchase and delivery Amazon, Lazada End user
of tangible goods (online marketplace) Online marketplace
Online seller
Manufacturer
Payment systems provider
Technology provider
Internet service provider
Advertiser
Delivery driver
Source: Author’s compilation

Each actor may be associated with several flows of value (either

as its origin or its endpoint). These flows can be enumerated based on:
(a) desk research and consultation with key informants, (b) application
interfaces (such as the cart and checkout options) of the actors’ websites,
and (c) end-user agreements upon signup. It should be noted that while
the enumeration of these flows may not be exhaustive, the information
collected from public sources may be sufficient to expose the structural
properties of the flows within each revenue model.
Since every flow of value has an endpoint (i.e., payment will always
have a recipient), the researcher defined a flow relative to its origin.
In the case of an end user participating in the “purchase and delivery

33
Rethinking Taxation in the Digital Economy

of tangible goods” revenue model variation, there is a flow of value

linking it to a payment system provider (through credit or initial
deposit for remittance). Table 5 enumerates the flows of value for the
abovementioned revenue model.

Discovering network structure of actors and flows

In Table 6, each actor in a given flow of value is represented as A1…An in
a two-dimensional adjacency matrix. Each flow, regardless of its
transaction amount or legal nature, is abstracted into a discrete
relationship r in the intersection between any two actors, with a value
of “1” if there is a flow of value between the actors, and “0” if none.
The same adjacency matrix can be represented visually in a graph.
In Figure 1, each actor is represented as a node; and each flow of value
between them is shown as a line. Initially, this graph structure will
only represent the presence and the direction of a flow of value. All the
links will have the same weight (or “degree”, in network parlance) and
originate from one node and terminate in another.
This rendering of the actors and flows of value as a network
enables one to conduct both intuitive and mathematical analyses. It
can provide not only a positive description of the flow of value along
the value chain but may also be used to make normative evaluations
to guide tax policy in terms of:
a. Overall structure of the network. The network of revenue
flows may have a high degree of centralization, which
means that taxation can be focused on actors at the center of
the network;
b. Important actors. In addition to central actors, the graph can
also identify those at the edge of networks, who are likely to be
those who initiate the transactions or the ultimate beneficiaries
of the value flows; and
c. Critical paths. Construction of tax policy (or implementing
it through investigation and enforcement action) will involve
traversing network components at the most optimal path to
trace the flow of value.

34
Table 5. Actors and flows of value involved in the “purchase and delivery of tangible goods” revenue model variation
Revenue Model Actors Outward Flow of Value Related Notes
to Actor
Purchase and End user (A1) • End user pays through (or loans Although ultimately meant for the online marketplace, there
delivery of tangible from) payment systems provider is a flow of value from the end user to the payment systems
goods such as (for online marketplace) provider that facilitates the payment (through “loading” of
Amazon and money or a credit transaction)
Lazada (the online • End user pays internet For the cost of internet connectivity
marketplace) service provider
Online marketplace • Online marketplace pays Since the online marketplace interacts with the payment system
(A2) online seller provider, it receives payment from the end user first and remits
it to the online seller later
• Online marketplace pays For processing fees, or interest if the online marketplace relies
payment systems provider on a credit facility
• Online marketplace pays For products and services necessary for maintaining the online
technology provider marketplace’s technological infrastructure
• Online marketplace pays internet For internet connectivity between its infrastructure and
service provider its end users
• Online marketplace pays through For delivery of the goods to the end user
payment systems provider (for
delivery driver)
• Online marketplace pays Online marketplace may encourage end user adoption through
cashback (discount) to end user incentives that may include direct payments or store credits
Online seller (A3) • Online seller pays advertiser For the promotion of goods offered by the online seller
• Online seller pays manufacturer For the cost and delivery of the goods offered by the
online seller
 Revenue Model Actors Outward Flow of Value Related Notes
to Actor
Manufacturer (A4) – –

Payment systems • Payment systems provider Remittance of the amount paid for goods by the end user
provider (A5) remits to an online marketplace
• Payment systems provider Remittance of the amount paid for internet connectivity (by the
remits to internet end user, online seller, or online marketplace)
service provider
• Payment systems provider Remittance for service fee for delivery of goods to end user
remits to the delivery driver
• Payment systems provider pays Payment systems provider pays for connectivity on its
internet service provider own behalf
Technology provider • Technology provider pays For internet connectivity required to build and maintain
(A6) internet service provider technological infrastructure
• Technology provider pays In some instances, use of the payment systems provider is a
payment systems provider subcontract from the technology provider
Internet service • Internet service provider pays Internet service providers may employ payment systems
provider (A7) payment systems provider providers to receive payments from end users and
online marketplace
Advertiser (A8) • Advertiser pays Advertiser pays fees to online marketplace for placement of its
online marketplace ads in the platform
• Advertiser pays online seller Alternatively, the advertiser can pay placement fees to the
online seller’s shop
• Advertiser pays internet Advertiser pays the internet service provider for connectivity as
service provider well as information on end user traffic

Delivery driver (A9) – –

Source: Author’s compilation
 Data Collection and Analysis

Table 6. Adjacency matrix representation of the presence of flows of value

in the “purchase and delivery of tangible goods” revenue
model variation*
A1 A2 A3 A4 A5 A6 A7 A8 A9

A1 – 0 0 0 1 0 1 0 0
A2 1 – 1 0 1 1 1 0 1
A3 0 0 – 1 0 0 0 1 0
A4 0 0 0 – 0 0 0 0 0
A5 0 1 0 0 – 0 1 0 1
A6 0 0 0 0 1 – 1 0 0
A7 0 0 0 0 1 0 – 0 0
A8 0 1 1 0 0 0 1 – 0
A9 0 0 0 0 0 0 0 0 –
* Where r is any flow of value and A1…An is the set of actors participating in the value chain

Legend:
A1 - End user A6 - Technology provider
A2 - Online marketplace A7 - Internet service provider
A3 - Online seller A8 - Advertiser
A4 - Manufacturer A9 - Delivery driver
A5 - Payment systems provider

Source: Author’s compilation

Figure 1. Graphical representation of the flows of value in “purchase and

delivery of tangible goods” revenue model variation

Legend:
A1 - End user A4 - Manufacturer A7 - Internet service provider
A2 - Online marketplace A5 - Payment systems provider A8 - Advertiser
A3 - Online seller A6 - Technology provider A9 - Delivery driver

Source: Author’s rendering

37
Rethinking Taxation in the Digital Economy

Purposive sampling of revenue models and networks for analysis

From such data, it would be possible to derive the graph structure of
all the revenue models previously enumerated. However, to simplify the
analysis and presentation in this study, adjacency matrices were only made
for the following revenue model variations: (a) purchase and delivery
of tangible goods; (b) subscription for media content; and (c) gaming
and/or gambling. All these share the same essential network structure.
This abstraction of all revenue models into three “exemplar
networks” can be justified by the following points:
a. The three exemplars already cover all the categories of
contractual subjects of the revenue models enumerated:
tangible goods and intangible goods/services;
b. The advertisement revenue model can be folded into these
exemplars by including the advertiser (and all related flows of
value) in the network;
c. The commission-based revenue model can also be accounted
for by the incoming flows of value to mediating platforms (such
as an online marketplace, or media streaming provider); and
d. The configuration of actors and flows of value for all other
revenue models are already reflected in the exemplars.

Discovery of completeness of tax regime modalities

Once the exemplar networks were identified, the researcher found and
matched the appropriate provision of tax law that relates to each flow of
value through any of the following modalities (as discussed in Section 3
of this paper):
a. Attribution to the source of revenue to the local jurisdiction;
b. Computation of base and rate;
c. Surveillance mechanisms, such as data submissions, and
audits; and
d. Enforcement mechanisms in case of delinquency.

Cumulatively, these modalities actualize taxation of a particular

flow of value. However, each modality must be present to make the
imposition of tax on an actor possible. Thus, the presence of a provision
corresponding to each modality for every local recipient of the flow is
encoded as a score of “1” in a new adjacency matrix. For example, in

38
 Data Collection and Analysis

the case of the inflow of value to the online marketplace (A2) from the
end user (A1), the current tax regime is capable of attributing at least part
of that amount as taxable income of the online marketplace. From that
initial attribution, the local tax regime has provisions to compute the
amount due (including deductions and exceptions). This is supported by
laws and administrative issuances for the surveillance of the value flow
(such as the submission of regular tax returns as well as the conduct of
audits). Finally, failure to pay income taxes is penalized through fines
or imprisonment.
In Table 7, the total score corresponding to each flow can then
be considered as a metric of the robustness (or completeness) of the
tax regime corresponding to the flow of value under consideration.
A score of “5” (“4” points for all the modalities, plus the initial score of “1”
representing the presence of a revenue flow) means that the tax regime
completely covers the flow of value.

Table 7. Adjacency matrix of the robustness of the tax regime in the

“purchase and delivery of tangible goods” revenue model variation
(on Philippine-based parties)*
A1 A2 A3 A4 A5 A6 A7 A8 A9

A1 – 0 0 0 5 0 5 0 0
A2 5 – 5 0 5 5 5 0 5
A3 0 0 – 5 0 0 0 5 0
A4 0 0 0 – 0 0 0 0 0
A5 0 5 0 0 – 0 5 0 5
A6 0 0 0 0 5 – 5 0 0
A7 0 0 0 0 5 0 – 0 0
A8 0 5 5 0 0 0 5 – 0
A9 0 0 0 0 0 0 0 0 –
* Where r is any flow of value and A1…An is the set of actors participating in the value chain, and
where all parties are based in the Philippines
Legend:
A1 - End user A6 - Technology provider
A2 - Online marketplace A7 - Internet service provider
A3 - Online seller A8 - Advertiser
A4 - Manufacturer A9 - Delivery driver
A5 - Payment systems provider
Source: Author’s compilation

39
Rethinking Taxation in the Digital Economy

These scores enable the study to generate a directed, weighted

graph of the flows for the above revenue model. The graph reflects not
only the presence and direction of the flow but also the extent to which
the law covers the flow (and therefore the likelihood that the flow will
be subject to taxation).
The above analysis only holds for the assumption that all recipients
of the flows of value are local persons or entities. However, the primary
problem in the taxation of the digital economy is the cross-border nature
of transactions and actors. To introduce an international component to
the model, the researcher also considered the applicable modalities of
taxation provided by the Philippine tax treaty with the US. This means
that for each of the exemplar networks, data were collected under the
assumption that any of the relevant actors might be based in the US.

Purposive sampling of US-based online platforms

To consider every foreign actor covered by every tax treaty will mean
a multiplication of the frames of analysis. Not only are there multiple tax
treaties that could cover actors in multiple jurisdictions, but there can
also be multiple network models depending on how many actors operate
abroad. Instead of going through every network permutation, the
researcher thus focused on scenarios where the online platform provider
(e.g., media provider, online marketplace, gaming platform) or the
enabling technological service is based in the US. After all, the US is the
central location in the network of revenue flows and the chosen country
of residence of corporations behind most major online platforms.
An evaluation of the existing rules applicable to a US-based online
platform (such as Netflix or Amazon) yielded the adjacency matrix
in Table 8.
Table 8 can then be rendered into a graph with the same network
structure of value flows for a selected revenue model. For example, the
cell at the intersection between A2 and A1 has a value of “1”, reflecting
an incoming flow of value from the end user to an online marketplace
based in the US. This low value (relative to a maximum of “5”) indicates
no legal regime for attribution, computation, surveillance, and
enforcement. In Figure 2, this translates to a thin line from A2 to A1.

40
 Data Collection and Analysis

Table 8. Adjacency matrix representation of the robustness of the tax regime

in the “purchase and delivery of tangible goods” revenue model
variation (assuming platform is US-based)*
A1 A2 A3 A4 A5 A6 A7 A8 A9

A1 – 0 0 0 5 0 5 0 0
A2 1 – 1 0 1 1 1 0 1
A3 0 0 – 5 0 0 0 5 0
A4 0 0 0 – 0 0 0 0 0
A5 0 1 0 0 – 0 5 0 5
A6 0 0 0 0 5 – 5 0 0
A7 0 0 0 0 5 0 – 0 0
A8 0 1 5 0 0 0 5 – 0
A9 0 0 0 0 0 0 0 0 –
* Where r is any flow of value and A1...An is the set of actors participating in the value chain, where
the online platform is based in the US.

Legend:
A1 - End user A6 - Technology provider
A2 - Online marketplace A7 - Internet service provider
A3 - Online seller A8 - Advertiser
A4 - Manufacturer A9 - Delivery driver
A5 - Payment systems provider

Source: Author’s compilation

On the other hand, the flow of value between an end user (A1)
and a local internet service provider (A7) is subject to income tax and
VAT; the “5” at the intersection of these actors represent the existence of
a robust tax regime capable of capturing the value flow between them.
Thus, this higher score is reflected in the thicker line between A1 and
A7. Although Figure 2 is structurally the same as Figure 1, the placement
of its components has been rearranged to increase the visibility of the
following information: the number of degrees, or incoming and outgoing
connections, for each node (indicated inside the node and separated
from the node name by a dash) as well as the weight of each connection,
representing the robustness of the local tax regime relative to the
revenue flow.

41
Rethinking Taxation in the Digital Economy

Figure 2. Weighted, directional network of value flows reflecting robustness

of the tax law applicable to the flow

Legend:
A1 - End user A6 - Technology provider
A2 - Online marketplace A7 - Internet service provider
A3 - Online seller A8 - Advertiser
A4 - Manufacturer A9 - Delivery driver
A5 - Payment systems provider

Source: Author’s compilation

42
 Findings and Recommendations

Findings and Recommendations

The analysis revealed a common structure to digital commerce value

chains—one defined by features such as the centrality of platforms and
payment systems. It also uncovered gaps in the existing tax policy.

Centrality of platforms
Platforms, such as online marketplaces, streaming services, and gaming
sites, occupy a central place in the network of value flows. In the case of
the online marketplace considered in Figure 2, two network measures
are of interest:
a. The “closeness centrality”, which is a node’s inverse average
distance from all other nodes;18 and
b. The “betweenness centrality”, which is the extent to which the
node lies on the shortest path between all other nodes.19

The online marketplace has a closeness centrality of 0.8, the highest

for the entire network. This suggests that this node is poised to readily
acquire and distribute information and resources relative to others in
the network (Borgatti 2005). On the other hand, the online platform has
the highest level of betweenness centrality at 25. This can be interpreted
as a high degree of prestige and influence in the network, under the
assumption that other actors in the network will gravitate toward the
shortest path (Krebs 2002).
The digital platform’s place in this structure aligns with the intuitive
notion (as expressed in proposed tax reforms) that platforms should be
subject to additional tax obligations. Given the increased wealth and
power of these online platforms, governments can make the policy call
of subjecting them to a greater tax burden.
A platform’s place in the network is characterized by both
inflows (from end users and advertisers) and outflows (to the sources

18
A node’s distance is a function of the number of links required to traverse it from another node.
The higher a node’s closeness centrality (e.g., closer to a perfect closeness centrality of 1), the
shorter its distance from all other nodes (Neo4j n.d.-a).
19
There are several algorithms for calculating a node n’s betweenness centrality, all of them
involve computing the number of shortest paths from one given set of nodes to another, and then
determining the number of those shortest paths that pass through n (Neo4j n.d.-b).

43
Rethinking Taxation in the Digital Economy

of its offerings and the providers of underlying functionality and

connectivity). This suggests that aside from being the ultimate recipient
of value in its own right, a platform is also an intermediary passing
forward payments to individual online sellers and sources of the goods
and services offered.
Flows of value can also correspond to flows of information and
control. This makes platforms uniquely positioned to contribute in other
ways. For instance, online marketplaces and platforms can be considered
withholding tax agents that precompute the tax payable by its users
and remit the tax due to the BIR. Payment systems providers are also
centralized actors that act as intermediaries and can present information
on the income and purchases of actors in the network.
The increasing importance and power of platforms and the actual
modalities required to make the tax law meaningful are not sufficiently
addressed by the proposed tax revisions. Although the proposed law
considers income derived by nonresident digital services from local
users as taxable, it does not provide details as to how other modalities
of tax law can be implemented for such actors. The proposal is based
on nonresident services registering themselves into a system but does
not specify how nonresident digital services can be made to comply by
either registering or attending to subsequent tax obligations. Due to
the distributed, international nature of the internet and the lack of
legal and practical tools to come up with a more meaningful definition
of jurisdiction limits, no local legislation can adequately capture
revenues from online transactions.

Disparity of tax coverage

As Table 7 shows, there is already a robust legal coverage for
taxing local actors’ online transactions. The BIR recently released
interpretative issuances to align online transactions with existing tax
laws, such as RMC 60-2020 for online sellers and RMC 25–2022 for
e-sabong operators.
RMC 60-2020 is mostly concerned with the revenue received by
online sellers (or operators of individual “stores” hosted on an online
market platform) rather than the revenue collected by the online

44
 Findings and Recommendations

market platform itself. Meanwhile, RMC 25–2022 clarifies how the

existing tax law applies to e-sabong platforms operating locally. That is,
the law applies (a) a tax based on the Philippine Amusement and
Gaming Corporation’s gaming franchise extended to an e-sabong
operator, (b) regular income tax, and (c) VAT.
These issuances are based on existing laws and only clarify how
the current tax regime can apply to online transactions of local actors.
They do not impose new tax obligations or new methods of collecting
and enforcing tax liabilities.
Moreover, neither of the aforementioned issuances has legal
coverage for platforms located abroad. This is attributable to the
territorial nature of existing tax laws. Tax treaties, such as the one
executed with the US, exist to exclude foreign companies’ income from
national tax jurisdiction even if the revenue is derived from users
residing in the Philippines. In this paper’s network analysis, such
nature of tax treaties is reflected in the attenuated lines connecting
the digital platforms to the rest of the network. The weighted degree
of the node for digital platforms—a measure of the robustness and
applicability of the local tax regime to the revenue flows—is low
compared to the rest of the network. With a weighted degree of 8,
the digital platform ranks as the third lowest—higher only than
the delivery driver (6) and the manufacturer of the goods (5). This
suggests that despite the aforementioned centrality, digital platforms
are underutilized as a focal point of tax administration.
The OECD framework can address such imbalance because it
attributes revenue to the source state where users are located as well as
provides formulas to determine the tax liability of online platforms even
if these are nonresidents of the taxing jurisdiction. However, it does
not detail how local tax authorities can operationalize this new taxation
authority. Specifically, the framework lacks provisions on information
sharing, payment, and security mechanisms that will allow local tax
authorities to conduct computation, surveillance, and collection and
execution—all the modalities for a full and robust tax regime.

45
Rethinking Taxation in the Digital Economy

Recommendations for reform

Based on this study’s findings on the structure of the digital commerce
value chain and its possible interactions with both current and proposed
tax regimes, the following are some policy prescriptions:

Optimizing existing tax authority over platforms

In a virtual and cross-border world of digital transactions, the
effectiveness of current tax measures is limited. The ease in the way
online accounts are set up and deployed as digital storefronts (often
anonymously) by users operating from home, and through platforms
that operate abroad, is an enforcement challenge to the BIR.
Given the breadth of the digital commerce value chain and the
variety of transactions involved, tax administration will depend on the
internal revenue agency’s ability to take on the additional computational
and logistical burden.20 Nevertheless, some steps can be taken to optimize
existing tax authority over these junctures in the value chain.
For instance, Congress can pass legislation concerning the central
role of online platforms and payment systems. It can also mandate
additional tax liabilities and require online platforms to act as withholding
agents of online sellers’ income or VAT or to provide data needed to
determine the tax liability of related actors and transactions.
Concentrating on these key participants allows tax administration
efforts to scale since each centralized node can provide information and
control over a significant number of users. Policymakers expect digital
platforms—even those based abroad—to comply with these additional
tax obligations. Despite being isolated from local jurisdictions,
international corporations tend to cooperate since they prefer to have
continued access to their local users and partners (e.g., payment systems,
logistics) without legal and reputational complications.21

20
Key informant interview with Atty. Josephine Gomez (Assistant Revenue District Officer, Bureau of
Internal Revenue, Muntinlupa City, Philippines) on September 6, 2022.
21
Key informant interview with Undersecretary Mark Joven (Head, Department of Finance
International Finance Group, Manila, Philippines) on September 23 and November 30, 2022.

46
 Findings and Recommendations

Digital-ready tax administration

To verify platforms’ compliance with withholding and remittance
obligations, the BIR should possess awareness of both transaction data
(users, sales) and logic (procedures and algorithms) of these platforms.
This will be analogous to the level of access that the BIR has over
point-of-sale (POS) systems.
However, there is a marked difference in scale and sophistication
between centralized digital platforms and POS systems. Centralized
digital platforms will have a higher volume of transaction data spread
across more users, have more functionalities, and can be distributed
across multiple machines. The BIR will need to upgrade its knowledge
base and competence to better understand online systems (at the
network, hardware, and software levels) as well as to validate and
process voluminous datasets.

Expanded scope for investigation and liability

Sophisticated data analyses can reveal certain behavioral patterns that
may not have an apparent connection to tax irregularities but will
correlate with the latter and thus require further investigation. This
may include otherwise “neutral” indicators such as the timing of tax
payments and the identification of the most likely foreign counterparties
of local taxpayers.
These behavioral patterns may not square with traditional legal
requirements such as the evidence of some overt act or a fully formed
theory of causation that will qualify as the “probable cause” needed to
initiate investigations. Probabilistic signals coming from the analysis
of very large datasets may not be fully explained as legal liability at the
outset but can be the starting point of investigations. This will require,
in addition to clarificatory rules, a cultural shift among prosecutors
and judges. Additional training on both the promises and perils of
these analytical tools can be accommodated under the Mandatory
Continuing Legal Education (for practitioners) and the Philippine
Judicial Academy (for judges).

47
Rethinking Taxation in the Digital Economy

Engagement at the international level

Optimizing the local tax base and passing unilateral measures can only
go so far. Even if the BIR can scale its tax mapping and inspection
operations to include private residences without raising constitutional
objections, there is still the question of whether or not it can
apply the same to nonresidents. Nonresident providers—usually large
multinational corporations—have gained the most from digital markets
while minimizing the tax impact of their activities. For the Philippine
government, this reality will not just be a matter of maximizing tax
collection but also of ensuring equity and long-term development, as
local users and the country’s nascent digital commerce sector bear the
tax burden while their foreign counterparts evade liability.
Beyond the immediate need to expand the tax base and raise new
revenue, there is a growing political pressure to curb the power of
“big tech” and require them to pay their fair share. Imposing unilateral
measures on nonresidents through local legislation alone, however,
will depend on the nonresidents’ (and their home jurisdictions’)
incentives to cooperate with tax administrations. Barring the imposition
of unilateral measures, cooperation may be secured through the
Philippines’ willingness and capacity to use the blunt tool of complete
denial of market access—a move whose effectiveness depends on the
local market’s value and the nation’s trading position relative to the
nonresident providers’ home states.
Cross-border tax administration will depend on a baseline of
international cooperation, which can be secured through renegotiating
bilateral tax treaties with countries where online platforms are sited
and carving out an exception to the territoriality principle for certain
actors and online transactions. However, unless smaller economies find
additional leverage or combine their negotiating power, such bilateral
treaties can only offer limited gains.
Thus, the Philippines should continue to explore multilateral
options for reallocating taxing rights and addressing BEPS. Options
include regional tax treaties (e.g., at the ASEAN level) and the OECD
framework treaty. As mentioned earlier, efforts at negotiating and
crafting the provisions should take into account the Philippines’
trading power relative to other countries and its comparative ability
to exercise jurisdiction.

48
 References

Policymakers acknowledge that this approach to tax reform

is not without its own challenges. Each country has developed its tax
regime based on the idiosyncrasies of its history, political and economic
system, and relative bargaining power. National legislatures cannot
be expected to easily revisit the commitments and compromises they
have already navigated (often at great political cost).22 For example,
the OECD framework proposes the reduction of corporate income
taxes to 15 percent. Since the Philippines’ Corporate Recovery and Tax
Incentives for Enterprises (CREATE) Act had only recently lowered the
Philippine corporate income tax from 30 percent to 25 percent, a further
reduction to 15 percent is an aggressive target that may not be fiscally
and politically feasible.
To make the multilateral approach more feasible, the Philippines
can consider an incremental approach. For instance, it may enter into
an OECD framework-like agreement with regional blocs (ASEAN, EU).
Such blocs can negotiate as an organization to counterbalance the larger
economies. The Philippines can also limit the scope of initial multilateral
agreements to talking points that can enhance its tax administration
without implicating the political aspects of the tax law (such as
information sharing between tax authorities).

22
Undersecretary Mark Joven also pointed out that the tax law implicates issues of fairness as well
as the sovereignty of states. For these reasons, the tax law tends to be “sticky” and resistant to
change (based in an interview with Undersecretary Mark Joven on November 30, 2022).

49
Rethinking Taxation in the Digital Economy

References

Beaudoin, S. 2020. Death and taxes or lack thereof: Conflicting views of

multinational corporate digital tax between the United States and
European Union. Suffolk Transnational Law Review (43).
Borgatti, S. 2005. Centrality and network flow. Social Networks 27(2005):55–71.
Bukht, R. and R. Heeks. 2017. Defining, conceptualising and measuring the
digital economy. Manchester Centre for Development Informatics
Working Paper 68. Manchester, UK: Centre for Development
Informatics, Global Development Institute, SEED.
Bureau of Internal Revenue (BIR). 2003. Revenue Memorandum Order 31-2003.
Prescribing the guidelines and procedures for the implementation of the
modified tax compliance verification drive. Quezon City, Philippines: BIR.
———. 2005. Revenue Memorandum Circular 44-2005. Taxation
of payments for software. Quezon City, Philippines: BIR.
———. 2005. Revenue Regulation 16-2005. Consolidated value-added tax
regulations of 2005. Quezon City, Philippines: BIR.
———. 2012. Revenue Regulation 7-2012, Sec. 7(5). Amends the consolidated
revenue regulations on primary registration, updates, and cancellation.
Quezon City, Philippines: BIR.
———. 2013. Revenue Memorandum Circular 55-2013. Reiterates taxpayers’
obligations in relation to online business transactions. Quezon City,
Philippines: BIR.
———. 2015. Revenue Memorandum Circular 70-2015. Reiterating the tax
treatment of certain persons engaged in the business of land
transportation. Quezon City, Philippines: BIR.
———. 2020. Revenue Memorandum Circular 60-2020. Obligations of persons
conducting business transactions through any forms of electronic media,
and notice to unregistered business. Quezon City, Philippines: BIR.
———. 2021. Revenue Memorandum Circular 97-2021. Taxation of any income
received by social media influencers. Quezon City, Philippines: BIR.
———. 2022. Revenue Memorandum Circular 25-2022. Clarifies the taxability
of electronic sabong (e-sabong) operations as regulated by the Philippine
Amusement and Gaming Corporation (PAGCOR). Quezon City,
Philippines: BIR.
Conventus Law. 2021. Indonesia digital services tax. [Link]
report/indonesia-digital-services-tax (accessed on December 14, 2022).
Cuenca, J.S. 2021. Emerging tax issues in the digital economy. PIDS Discussion
Paper Series 2021-08. Quezon City, Philippines: Philippine Institute
for Development Studies. [Link]
PUBLICATIONS/[Link] (accessed on December 14, 2022).

50
 References

Diop, N., M. Warwick, H. Zaman, A. Fock, C.T. Niang, S. Coulibaly, and

B. Hansl. 2020. Philippines digital economy report 2020: A better normal
under COVID-19 - Digitalizing the Philippine economy now (English).
Washington, DC: World Bank Group.
Edrey, Y. and A. Jeffrey. 2012. Taxation of international activity: Over relief
from double taxation under the US System. International Tax and Business
Law 9(101).
European Commission. 2018. Fair taxation of the digital economy.
[Link]
taxation-digital-economy_en (accessed on August 25, 2020).
Executive Order 132. 2021. Adjusting the dividend rate of the Land Bank of the
Philippines pursuant to Section 5 of Republic Act 7656. Manila, Philippines:
Office of the President of the Philippines.
[Link]. 2021. Thailand’s application of VAT on digital services (e-services)
provided by foreign operators will apply as of 1 September 2021.
[Link]
digital-services-e-services-provided-by-foreign-operators-will-apply-
as-of-1-september-2021 (accessed on December 14, 2022).
Huws, U. 2014. Labor in the global digital economy: The cybertariat comes of age.
New York, NY: Monthly Review Press.
Inland Revenue Authority of Singapore. n.d. GST on imported services.
[Link]
economy/gst-on-imported-services (accessed on December 14, 2022).
Internal Revenue Service. 2019. Federal Regulation 40317. Classification of
cloud transactions and transactions involving digital content. Federal
Register (84):157.
Jopson, B., R. Toplensky, and J. Brundsen. 2018. Tech tax deepens EU-US trade
rift. Financial Times. March 16.
Justia US Supreme Court. 1992. Quill Corp. v. North Dakota, 504 US 298(1992).
Washington, DC: Justia US Supreme Court.
Kang, S. and J. Salinas. 2021. A challenge to section 861-type principles or nexus
redefined: A critique of global trends and developments concerning the
taxation of digital platforms. Corporate Taxation 47(2020):3–16.
Kingson, C.I. 1996. The David Tillinghast lecture: Taxing the future. Tax Law
Review 51(641).
Kirkell, B. and M. Bell-Jacobs. 2018. E-flight risk? Driving headlong into
the intersection of wayfair and the revenue rule. [Link]
insights/services/business-tax/[Link] (accessed on
December 14, 2022).
Krebs, V. 2002. Mapping networks of terrorist cells. Connections 24(2002):43–52.
Lamer, E. 2021. EU digital levy will be separate from OECD talks. Tax Notes
Today International. March 15.

51
Rethinking Taxation in the Digital Economy

Lamers, S., P. Mcharo, and K. Nakajima. 2014. Tax base erosion and profit shifting
(BEPS) and international economic law. Geneva, Switzerland: Graduate
Institute of International and Development Studies, Centre for Trade and
Economic Integration.
Li, J. 2017. Chapter 8: Protecting the tax base in the digital economy. In
United Nations handbook on selected issues in protecting the tax base of
developing countries, edited by A. Trepelkov, H. Tonino, and D. Halka.
New York, NY: United Nations.
Mason, R. 2020. The transformation of international tax. American Journal of
International Law 114(3):353–402.
Medus, J.L. 2017. BEPS proposals to regulate digital business: Critical comments.
Journal of International Taxation (28):34–36.
National Internal Revenue Code (NIRC). 2005. Revenue Regulations 16-2005.
Consolidated value-added tax regulations of 2005. Quezon City,
Philippines: NIRC.
Neo4j. n.d.-a. Closeness centrality. [Link]
current/algorithms/closeness-centrality (accessed on December 14, 2022).
———. n.d.-b. Betweenness centrality. [Link]
science/current/algorithms/betweenness-centrality (accessed on
December 14, 2022).
Organisation for Economic Co-operation and Development (OECD). 2015a.
Action 1 tax challenges arising from digitalisation. [Link]
org/tax/beps/beps-actions/action1 (accessed on December 14, 2022).
———. 2015b. Addressing the tax challenges of the digital economy, action 1 - 2015
final report. Paris, France: OECD Publishing.
———. 2020. International community renews commitment to address tax
challenges from digitalisation of the economy - OECD. [Link]
org/tax/beps/international-community-renews-commitment-to-address-
[Link] (accessed on
December 14, 2022).
Ouyang, H. and J.G.S. Yang. 2019. A new tax regime: The base erosion and
anti-abuse tax. Practical Tax Strategies (102)5:4–14.
Republic Act 8424. 1997. Tax reform act of 1997. An act amending the national
internal revenue code, as amended, and for other purposes. Manila,
Philippines: Congress of the Philippines.
Rivas, R. 2021. BIR probes 250 social media influencers for tax compliance.
Rappler. September 16.
Serafica, R., M.A. Rosete, P.J. Camaro, and A.P. Salvanera. 2020. Issues paper
on the Philippine digital commerce market. PCC Issues Paper Series 3.
Quezon City, Philippines: Philippine Competition Commission.
[Link]

52
 References

Paper-2020-03-Issues-Paper-on-the-Philippine-Digital-Commerce-
[Link] (accessed on December 14, 2022).
Serzo, A.L. 2020. Cross-border issues for digital platforms: A review of
regulations applicable to Philippine digital platforms. PIDS Discussion
Paper Series 2020-45. Quezon City, Philippines: Philippine Institute
for Development Studies. [Link]
PUBLICATIONS/[Link] (accessed on December 14, 2022).
Spencer, D. 2020a. Taxation of the digital Economy: Proposal. Part 11. Journal of
International Taxation 31:30–43.
———. 2020b. The OECD work program: Digitalization of the economy. Part 8.
Journal of International Taxation 31:55–64.
———. 2021. Digital services taxes: The African tax administration forum
(ATAF) suggested approach.
Supreme Court of the United States. 2017. South Dakota v. Wayfair
Inc., et al. Washington, DC: Supreme Court of the United States.
[Link]
(accessed on December 14, 2022).
Tirole, J. 2016. Économie du bien commun. Paris, France: Presses Universitaires
de France.
United Nations. n.d. Tax treatment of payments for digital services.
[Link]
digital-services (accessed on December 14, 2022).
Yang, J., J.Z.H. Lee, and V. Metallo. 2019. Emerging tax issues in digitized
internet commerce. Journal of Internet Law 22(12):7–17.
Yeoh, C.G. and G. Ong. 2021. What foreign digital service providers need
to comply with in Malaysia. [Link]
foreign-digital-service-providers-need-to-comply-with-in-malaysia
(accessed on December 14, 2022).

53
Rethinking Taxation in the Digital Economy

Annexes

Annex A. Revenue models for online businesses

I. Subscription – user pays a recurring fixed fee (for delivery of goods
and services):
A. For access to digital content
1. Media subscription services – Netflix, Spotify
2. News or magazine subscription – New York Times, Inquirer
B. Subscription for physical goods – Hello Fresh
C. Subscription to applications – Google Workspace, Headspace
D. Provision of technology (bandwidth, computation,
storage) – AWS, Azure, Google Cloud
E. Access to information
1. Database subscription – Westlaw, Lexis Nexis
2. Access to user information
a. Profile and behavioral info (usually for serving
ads) – Facebook/Meta, Google
b. Contact information for direct solicitation and
promotion – Melissa

II. Pay-per-view (or pay-as-you-go)

A. Payment for media
1. Buy or rent movies, albums – iTunes
2. Licensing of intellectual properties – photos, videos, fonts,
and other design elements – Behance, Adobe
B. Pay-per-view access to documents – Scribd
C. Payment for apps – Apple App Store
D. Purchase and delivery of tangible goods – Amazon, Lazada
E. Delivery of services
1. Freelance work – ODesk
2. Ridesharing – Grab

III. Ad-revenue model

A. Payment based on the number of clicks or views – YouTube
B. Preferential treatment of content (boosting) – Facebook/Meta
C. Affiliate links or codes – podcasters

54
 Annexes

D. Sponsorship of content – vloggers

E. Product placement in content
1. Influencer use of product
2. Use of product in fictional narrative

IV. Percentage of online transactions (commission-based)

A. App store
1. App Store and Google Play Store
2. Steam Store for games
B. Payment systems
1. Convenience or service charges - on the retailer side
2. Financial charges - on the buyer side
3. Interest on float
C. E-commerce platforms
D. Service platforms
1. Ride hailing - Grab
2. Delivery - Grab, Foodpanda

V. Gaming
A. Gambling
1. Chance-based - Bingo, roulette
2. Skills-based - horse races, cockfights, and poker
B. Microtransactions - Ubisoft
C. Loot Crate - Electronic Arts

VI. Donation/pay-what-you-want

VII. Special cases

A. Cryptocurrencies
B. Nonfungible tokens (NFTs)

Notes:
1. Businesses can take a hybrid, multitiered revenue model (e.g., offer a free version of their
offerings, with tiered pricing for additional features)
2. Multisided markets can involve multiple revenue streams. For instance, a social media site can:
a. Receive a share of advertising revenue displayed on its users’ accounts
b. Get additional fees to boost content
c. Get a percentage of user-to-user transactions

55
Rethinking Taxation in the Digital Economy

Annex B. Sample revenue flow analysis

Use case A user of an e-commerce platform, using it to order consumer
or retail goods
Transaction The user connects to the internet through an information
service provider or telecommunications company.
Cross-border issues Requires connectivity equipment from provider to be installed
within the jurisdiction
Telecommunications companies are considered public utilities
and subject to nationality requirements under the law.
Flow of value The user pays a monthly service/subscription fee to the
telecommunications company.
Tax treatment A value-added tax (VAT) for services to be paid by the user
An income tax to be paid by the telecommunications provider
Attribution The taxable incident is the purchase of services by the user
from telecommunications companies
Input tax, as evidenced by a VAT invoice or official receipt, shall
be creditable against the output tax for the purchase of services
on which VAT has been paid (Sec. 110[A.1.b.], NIRC).
The taxable incident is the providing of services (taxable
services) by the telecommunication companies to the user.
Telecommunications companies are public utilities required to
be registered under Philippine law. Accordingly, the services
they render inside and outside of the country (Sec. 22[B], NIRC
in relation to Sec. 27) are subject to corporate income tax.
Computation A VAT of 12 percent shall be levied, assessed, and collected on
gross receipts derived from the sale or exchange of services,
including the use or lease of properties (Sec. 108[A], NIRC).
Normal Corporate Income Tax (NCIT)
The NCIT for domestic corporations (DC) is computed
as follows:
(Taxable income x Tax rate)
Currently, the tax rate for DCs is generally 25 percent, as
amended by the Corporate Recovery and Tax Incentives for
Enterprises (CREATE) Act. However, if a DC has a net taxable
income of not more than PHP 5 million and assets of not more
than PHP 100 million, a lower tax rate of 20 percent is imposed.
Taxable income is computed as follows:
(Gross receipts - Cost of services - Sales returns,
Discounts, and Allowances - Deductions)

56
 Annexes

Minimum Corporate Income Tax (MCIT)

Note, however, that in the event that the MCIT is greater than
the NCIT, starting from the fourth year of operations, the
former will be imposed (Sec. 27, NIRC).
MCIT is computed as follows:
(Gross Income x 2%*)
*CREATE Law provides that from July 1, 2020 to July 30, 2023,
MCIT rate is at 1 percent
Surveillance A VAT-registered person shall issue:
a. A VAT invoice for every sale, barter, or exchange of goods
or properties; and
b. A VAT official receipt for every lease of goods or
properties, and for every sale, barter, or exchange of
services (SEC. 113[A], NIRC).
The following information shall be indicated in the VAT invoice
or VAT official receipt:
a. A statement that the seller is a VAT-registered person,
followed by his Taxpayer Identification Number (TIN); and
b. The total amount that the purchaser pays or is obligated
to pay to the seller with the indication that such amount
includes the VAT. Provided, that the amount of the tax shall
be known as a separate item in the invoice or receipt;
c. The date of transaction, quantity, unit cost, and description
of the goods or properties or nature of the service; and
d. In the case of sales, in the amount of PHP 1,000 or more
where the sale or transfer is made to a VAT-registered
person, the name, business style, if any, address, and TIN
of the purchaser, customer or client (Sec. 113[B], NIRC).
In addition to the regular accounting records required, a
subsidiary sales journal and subsidiary purchase journal shall be
maintained on which the daily sales and purchases are recorded.
The subsidiary journals shall contain such information as may be
required by the Secretary of Finance (Sec. 113[C], NIRC).
Every corporation is required to file the following income
tax returns:
• In duplicate, a quarterly summary declaration of its gross
income and deductions on a cumulative basis for the
preceding quarter or quarters. This declaration is the basis
upon which the income tax shall be levied, collected, and
paid (Sec. 75, NIRC).
• A final adjustment return covering the total taxable income
for the preceding calendar or fiscal year (Sec. 76, NIRC)

57
Rethinking Taxation in the Digital Economy Annexes

Other circumstances of filing:

Place of filing—filed with the authorized agent bank, revenue
district officer, collection agent, or the duly authorized treasurer
of the city or municipality that has jurisdiction over the location
of the principal office of the corporation filing the return, or
place where its main books of accounts and other data from
which the return is prepared are kept (Sec. 77[A], NIRC).
Time of filing the income tax return—The corporate quarterly
declaration shall be filed within 60 days following the close of
each of the first three quarters of the taxable year. The final
adjustment return shall be filed on or before the 15th day
of April, or on or before the fifteenth 15th day of the
fourth month following the close of the fiscal year, as the
case may be (Sec. 77[B], NIRC).
Enforcement If a person who is not VAT-registered issues an invoice or
receipt showing his TIN followed by the word “VAT”, the issuer
shall, in addition to any liability to other percentage taxes, be
liable to:
a. The tax imposed in Section 106 or 108 (12%) without the
benefit of any input tax credit; and
b. A 50 percent surcharge under Section 248(B) (25% or 50%)
of this Code (Sec. 113[D], NIRC).
Failure to pay will lead to three possible penalties:
1. A one-time surcharge of either 25 percent or 50 percent of
the basic tax (Sec. 248, NIRC);
2. 12 percent annual interest (Sec. 249, NIRC as amended by
Tax Reform for Acceleration and Inclusion Act);
3. One-time compromise penalty in lieu of criminal liability
(RMO 1907)

58
The Author

Emerson S. Bañez is an assistant professor at the University of the

Philippines (UP) College of Law, teaching in its Juris Doctor (JD) and
Master of Laws (LLM) programs. He obtained his JD from the UP, where
he became a member of the Philippine Law Journal, and his LLM from
Kyushu University. He also serves as special counsel of the Disini & Disini
Law Office and lectures at the UP Open University and the Philippine
Judicial Academy.

59