Imposition of 1% withholding tax on online sellers takes effect

MANILA, Philippines — The Bureau of Internal Revenue (BIR) has formally imposed the one percent withholding tax on online platform providers as the government moves to level the playing field among businesses.

In his latest revenue memorandum circular, BIR Commissioner Romeo Lumagui Jr. said all electronic marketplace operators were ordered to impose the withholding tax to sellers and merchants last July 15.

The imposition of withholding tax was supposed to begin in mid-April, but the BIR extended the transitory period for 90 days to give online merchants time to comply with the other related policies or requirements of other government agencies.

“We have already extended this by 90 days. No further extensions will be given,” Lumagui said.

A withholding tax is a kind of tax on the salary earned by a certain employee. Based on the current framework, employers are required to deduct a certain percentage of their employee’s salary, which in turn will be remitted to the BIR.

“This is not a new tax, it is merely a system of taxation where taxes are collected at source, which will be credited against the total income tax liability of the sellers and merchants,” Lumagui said.

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

Further, the circular only extended the transitory period for digital financial services providers.

The BIR will impose a withholding tax of one percent on one-half of the gross remittances of the online platform providers to the sellers of the goods and services.

The withholding tax imposed, however, will not apply if the annual total gross remittances to an online merchant for the past taxable year has not exceeded P500,000.

Also excluded are online sellers with cumulative gross remittances to an online merchant in a taxable year that have not yet exceeded P500,000, as well as those cooperatives duly registered with the BIR with a valid certificate of tax exemption.

Gross remittance is the total amount received by an e-marketplace operator or digital financial services provider from a buyer.

According to the BIR, e-marketplace refers to a digital platform whose business is to connect online consumers with online merchants, facilitate and conclude the sales, process the payment of the products, goods or services through the platform.

It also facilitates the shipment of goods or provides logistics services and post-purchase support within such platforms and otherwise retains oversight over the consummation of the transaction.

This includes the marketplace for online shopping, food delivery platforms, platforms for booking of resort, hotel, motel, inn, house, condominium unit, bed space, room for rent and other similar lodging accommodations and other service or product marketplaces.

Data showed that there are roughly two million entities involved in online selling as of last year.