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By:
Aila May S. Alvarez
Associate
Angara Abello Concepcion
Regala & Cruz Law Offices
[ACCRALAW].
In 2013, the BIR issued Revenue Memorandum Circular No. 55-2013 (RMC 55-13) which provides for the definition of, and the tax obligations of persons involved in, various online business transactions. As regards Internet or online advertising, the BIR defined the same as “a form of promotion that uses the Internet to deliver marketing messages to attract customers.” Among others, RMC 55-13 provides for the obligation of: 1) the advertising company to issue official receipt; and 2) the advertiser to withhold and remit to the BIR 2% tax. However, while RMC 55-13 gave fairly detailed rules on the obligations of online advertising companies and advertisers, it failed to consider that most online advertising companies are foreign corporations located abroad.
Generally, whenever a transaction involves foreign corporations, the situs of taxation of the income or transaction becomes an issue. As in the case of Internet or online advertising, the usual questions are: if all the services of the foreign advertising companies are performed, and all the facilities used for such services (i.e., computers, servers, among others) are located, outside the Philippines, are the service fees taxable in the Philippines? Does the fact that the online advertisements are viewable and accessible in the Philippines by the intended market/customer make the service taxable in the country?
Recently, other countries have taken steps in taxing online advertising transactions.
Japan, for example, imposed consumption tax to recipients located in Japan of cross-border digital services performed by offshore providers (i.e., reverse charge mechanism). India, likewise, intends to impose six percent (6%) equalization levy to non-resident online advertising companies which do not have permanent establishments in the country.
At present, no Philippine law categorically imposes tax on online advertising services rendered by non-resident foreign corporations. Admittedly, however, the provisions of the National Internal Revenue Code (Tax Code), a number of BIR rulings and the existing jurisprudence may provide for bases to either exempt or subject such transactions to Philippine taxes.
Possible bases to exempt from Philippine taxes -- Under Section 42 (C)(3) of the Tax Code, payments for services performed outside the country are considered income from sources outside the Philippines. In ITAD Ruling No. 014-01 (16 February 2001), the BIR ruled that if the editing, programming, designing and dissemination of the advertisement are done using the facilities located abroad, the situs of the income is abroad.
It may be argued that views or access within the Philippines do not make advertising service taxable in the country. In BIR Ruling No. 009-05 (2 August 2005), services rendered abroad through the Internet (i.e., registration and maintenance of domain names), even if the same are for clients located in the Philippines (i.e., domain name holders in the Philippines), are considered rendered outside the country. The BIR used the Supreme Court’s decision in CIR v. British Overseas Airways Corporation (G.R. No. 65773-74, 30 April 1987) where it was held that the situs should be where the activity which produced the income happened -- in case of service, where the services are performed. Further, in CIR v. American Express International, Inc. (G.R. No. 152609, 29 June 2005), the Supreme Court held that, for value-added tax (VAT) purposes, the service is different from the product or output that arises from the performance of the service. What determines jurisdiction is the place where the service is rendered, not the place where the output of the service will be ultimately used.
Possible bases to subject to Philippine taxes -- The Supreme Court’s decision in CIR v. British Overseas Airways Corporation, may likewise be used to argue that the display and/or viewing of the advertisements in the Philippines may be considered as the activity which produces the income. Considering that advertising companies are paid for the promotion of products in the Philippine market, it is the visibility of the advertisement in the country which makes the transaction taxable in the Philippines. Moreover, consumption, in the context of a service, means the performance or completion of a contractual duty, releasing the performer from future liability. If the advertising company will not be paid unless advertisements are viewable or accessible in the Philippines, then consumption, arguably, happens in the Philippines.
In addition, the local companies have to consider whether or not the advertising companies are residents of countries with existing tax treaties with the Philippines; if not, whether they, for other reasons, may be considered as doing business in the Philippines. These considerations are important, at least, for income tax purposes.
Unless a new law is passed or a Supreme Court decision covering the above issues is promulgated, the taxability of the service fees received by non-resident foreign online advertising companies from the Philippines will remain unsettled. As such, local companies availing of these services are constantly exposed to the risk of being pursued by the BIR. In case the BIR will take the strict position, the exposure may include the assessment of: a) deficiency 30% final withholding income tax; b) 12% final withholding VAT; c) 30% income tax on the disallowed advertising expenses due to failure to withhold taxes; d) 20% per annum interest for late payment; and e) 25% surcharge for non-filing of return and non-payment of taxes.
The views and opinions expressed in this article are those of the author. This article is for general informational and educational purposes only and not offered as and does not constitute legal advice or legal opinion.
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