The Coronavirus pandemic (more commonly known as COVID-19) has changed so much about the way we live, the things we used to do, the places we used to go, the friends, and even transactions we used to enter, and the way we used to pay for them! Consider this example, before people used to shop at Target physically and pay the full amount. However, now they can use a Target promo code and have everything delivered to their home. So eventually, we are all getting used to these changes and calling them “new normal” which means we should also get used to the tax implications since it has been said, “if there are two things certain in this world, they are death and taxes.”.
The Bureau of Internal Revenue (BIR) will not back down in doing its mandate, whether there’s pandemic or none, so let’s talk about the things you need to keep in mind when transacting online or not, especially related to withholding taxes, which is one of the major sources of the BIR’s revenue collection. There’s an issuance made by the BIR related to registration of online businesses (seller & service providers), but we’re not going to put too much attention to that. We’ll focus this article on the buyer side instead. Okay, so let’s start?
Compliance with tax requirements on online transactions
According to a news from CNN dated back May 27, 2020, “top online shopping platform assures compliance with laws amid proposal to tax e-commerce firms”. Would you believe so? Maybe. Even when the vendors using their platform are not necessarily BIR-registered businesses, they can withhold taxes before remitting the payments. Added to that is that buyers maybe using credit cards to make payments and therefore, banks are the ones required to withhold.
But how about the business buyers who are purchasing online to sustain business needs amidst the pandemic? Are you one of them, and if yes, are you compliant with the withholding tax requirements?
Obligation to withhold is discussed in detail in Revenue Regulations 11-2018, Amending Certain Provisions of Revenue Regulations No. 2-98, as Amended, to Implement Further Amendments Introduced by Republic Act No. 10963, Otherwise Known as the “Tax Reform for Acceleration and Inclusion (TRAIN)” Law, Relative to Withholding of Income Tax, and even when it’s not categorically stated there that withholding is required even on online purchase, it is required.
But it is really required for all businesses and all types of transactions? You are here to find out.
Who are required to withhold taxes?
If you are an individual final consumer and you don’t buy online for your business, are you required to withhold? Of course not! You may peacefully get out of here – the BIR won’t go after you.
Businesses, however, whether freelancers (including bloggers, vloggers/YouTubers), sole proprietors, partnerships, and corporations “maybe” required to withhold. Yes, it’s a “maybe” but be sure to check carefully whether you need to withhold on certain transaction/s or all transactions of similar classes. In case you face tax-exempt bond issues, you may have to seek Arbitrage Services from reputed professionals. They might be able to guide you through all your complicated tax-related issues. Also, by “businesses” I mean “registered” businesses with the BIR. If you are earning income and not registered, you are legally required to register, but registering is a topic that needs to be discussed separately.
Everyone maybe required to withhold (and are called withholding agent) depending on the types of transactions at varying rates as well. This is true for payments to professionals, contractors, lessors and others (for complete list refer to Revenue Regulations 11-2018). However, specific to purchase of goods and services (in general – so you need to check other types first), it is required for top withholding agents only.
* Top withholding agents shall include the following:
- Classified and duly notified by the Commissioner as either any of the following unless previously de-classified as such or had already ceased business operations:
- A large taxpayer under Revenue Regulations No. 1-98, as amended;
- Top twenty thousand (20,000) private corporations under RR No. 6-2009; or
- Top five thousand (5,000) individuals under RR No. 6-2009;
- Taxpayers identified and included as Medium Taxpayers, and those under the Taxpayer Account Management Program (TAMP).
What are the tax rates?
Following is a summary of who are required to withhold and the usual types of transactions:
|Nature of transaction||Who are required?||Rate of tax|
|Purchase of goods (in general)||Top withholding agents*||1%|
|Purchase of services (in general)||Top withholding agents*||2%|
|Payment to contractors||Everyone||2%|
|Payment to professional individual**||Everyone||5%-10%|
|Payment to professional corporation***||Everyone||10%-15%|
|Rental of real properties||Everyone||5%|
|Rental of personal properties||Everyone||5%|
** Payment to professional individuals are subject to 5% tax when annual gross income doesn’t exceed P3 million and you need a sworn declaration for that, while 10% when the annual gross income exceeds P3 million.
** Payment to professional corporations are subject to 10% tax when annual gross income doesn’t exceed P720,000 and you need a sworn declaration for that, while 15% when the annual gross income exceeds P720,000.
“Wait! This is too much information to absorb! Do you mean that if I am a professional earning less than P3 million, I should withhold 5% from all my clients? Or 5% for all payments to my vendors?”
The answer to the first question is NO! Good luck with that. Remember that you are the one being paid so how can you do the withholding?
The answer to the second question is NO as well! You may be required to withheld, but it’s not 5%. You need to consider the type of transaction as indicated above so you can decide. Instead, if you are a professional and pays rent for your office, electricity, and supplies, you are liable to withhold 5% for rent and, if you are a top withholding agent, 2% for electricity and 1% for supplies. Of course, in this example, only purchase of supplies can be done online, but you get the message, right?
Who are professionals?
We’ve been consistently mentioning professionals here but who are professionals, from whom you should deduct withholding tax for your payments to them? According to the Revenue Regulations 11-2018, professionals include:
- Those individually engaged in the practice of profession or callings (lawyers, certified public accountants, doctors of medicine, architects, marine surveyors, doctors of veterinary science, dentist, professional appraisers, and many more!
- Professional entertainers, such as, but not limited to, actors and actresses, singers, lyricists, composers and emcees
- Professional athletes including basketball players, pelotaris and jockeys
- All directors and producers involved in movies, stage, radio, television and musical productions
- Insurance agents and insurance adjusters
- Management and technical consultants
- Bookkeeping agents and agencies
- Other recipients of talent fees
- Fees of directors who are not employees of the company paying such fees, whose duties are confined to attendance at and participation in the meetings of the board of directors;
- Income Payments to certain brokers and agents
- Commissions of independent and/or exclusive sales representatives, and marketing agents of companies (including multi-level marketing companies)
So is this where online franchise referrals, networking and insurance commission income fall? Yes, absolutely! MLM and insurance agents work double time nowadays and the withholding tax on their income is deducted from their commission by their principal.
If you are a YouTuber, social media influencer or blogger, behold, you are also included in this category because you are effectively an independent marketer. I’m not sure how compliant is Google and other companies with the withholding tax requirements here, but there should be some form of withholding on your income, unless they utilize exemption by paying through credit cards, wherein the banks have the liability to withhold 1%, or when they invoke “not doing business in the Philippines” which is a separate topic that we won’t cover here.
Click “Continue reading” below to read more including the following:
- How to do the withholding and how to compute the withholding tax?
- Are there exemptions to withholding?
- Filing of monthly, quarterly and annual tax returns
- Tips, other matters and questions