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Taxation of digital firms seen hindered by policy, lack of infrastructure

THE government’s plan to tax the digital economy is bumping up against constraints like the absence of a standard regulatory framework for online platforms or the lack of adequate information technology infrastructure, according to the Philippine Institute for Development Studies (PIDS), a government think tank.

Addressing these “major policy gaps” is crucial before the digital economy can be effectively taxed, according to Janet S. Cuenca, a former research fellow at PIDS, said in a discussion paper, “Emerging Tax Issues in the Digital Economy: A Review of Literature.”

One basic gap is in measuring the size of the digital economy to estimate the industry’s potential tax base and raise revenue without unduly burdening the sector, it said.

“The issues and challenges in taxing the digital economy stem from (its) complex and multifaceted nature… Reaching a common understanding and measurement of the size and impact of the digital economy is critical in devising a tax regime,” according to the study.

The Philippine Statistics Authority started measuring the size of the digital economy relative to overall economic output in August 2018, but more information is needed, it said.

Another possible approach would be to reform the regulatory and legal framework to encourage more companies to enter the information and communication technology sector, raising the level of competition.

“There is no legal framework yet to regulate business platforms and facilitate new digital products. Furthermore, there is a lack of standard permits issued across LGUs, thus hampering the accelerated deployment of needed infrastructure,” it added.

The digital infrastructure gap also needs to be addressed, with internet speeds in the Philippines considered slow and expensive.

Consumers also have to be educated about the emerging digital economy and guard against cyber attacks.

“The opportunities and challenges that the digital economy bring are particularly important for developing countries, including the Philippines. Thus, it is deemed critical for the Philippine government to eliminate the barriers and challenges and also, address the identified policy gaps to fully reap the benefits from the digital economy,” PIDS said.

The government started considering taxing the digital economy last year as the pandemic drove more users to digital platforms and online services.

The Bureau of Internal Revenue issued a circular in June reminding businesses to register with the bureau for tax purposes.

Bills have also been filed in Congress aiming to collect a 12% value-added tax (VAT) on goods and services bought online, and tax streaming services.

The Department of Finance estimated that a VAT on online transactions will yield the government P14-17 billion in additional revenue in the first year of implementation.

Meanwhile, the National Tax Research Center proposed in a study that local government units (LGUs) could expand the coverage of their amusement taxes to include online streaming sites. — Beatrice M. Laforga

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