In general, countries that have implemented new tax measures to tax the digital economy seek a greater allocation of taxing rights to the source state, which is where the consumer market is located. Furthermore, taxing the digital economy would serve to reduce the competitive advantages of companies operating in the digital economy. These large technology companies allegedly face a lower tax burden than their traditional economic competitors, resulting in a scenario that distorts competition and increases the economic power of digital giants.
The Philippines government plans to adopt a well-thought-out strategy and policy package in taxing the digital economy. The deputy commissioner of the Bureau of Internal Revenue’s (BIR) Legal Group emphasised this at a recent webinar organised by state think tank Philippine Institute for Development Studies (PIDS).
As per a webinar discussant, she stated that the current global health crisis has accelerated the growth and expansion of the digital economy. She claims that the virtual business solution has provided a safer alternative to the Covid-19 pandemic. However, to effectively tax the digital economy, an appropriate regulatory and legal framework must be in place, she said.
The discussant explained that policies should not be simply copied from other countries but should be studied to ensure they are appropriate for the Philippine context. She also pointed out that Congress plays a significant role in providing government offices and regulators with enabling laws to ease the presence of constraints or the absence of controls, as well as in creating and defining parameters to ensure the country’s smooth transition to a digital economy.
“The digital economy and the digitalisation of the economy gave birth to new types of business entities and new business models that challenge the application of the current provisions of the Tax Code, which has been anchored and designed under a ‘brick-and-mortar’ or traditional way of doing business and reporting,” she said.
It is an overstatement to say that the digital economy has presented new challenges to tax policymakers. This is true not only for the application of brick-and-mortar tax rules to new disruptive business models but also for the effective enforcement of such tax rules against companies that do not have a physical presence in the country. These threats to national tax systems stem from the lack of physical presence, the heavy reliance on intangible assets, the complexity of digital economy transactions, and the difficulty of qualifying assets, activities, and types of income.
The commercial landscape has undeniably been transformed by digital technology. Businesses can now access markets across borders without establishing a physical presence thanks to digitisation. Due to territorial absence, and the novelty of digital technology that tax laws then could not have foreseen, for a time, tax authorities found themselves bereft of rights to collect taxes on digital businesses that cross international borders.
Meanwhile, international tax rules are being reformed in collaboration with other countries in order to keep up with the increasing digitalisation of business. Work is being done to reach an international agreement. Current international tax rules permit countries to tax non-resident companies’ profits attributable to a permanent establishment in that country. Transfer pricing rules seek to ensure that the profits of a multinational group are divided among the group companies in proportion to each company’s contribution to the profits generated.
With tax laws and policies in place, these tax measures can maintain neutrality and competition between companies operating in the digital economy and the traditional economy, without impeding economic development and the growth of start-up businesses.
