With the national coffers losing revenue due to the COVID-induced economic slowdown, two lawmakers want to make money out of digital subscription services, social media ads, and online marketplaces—or what will be known as “digital economy taxation”
According to Albay Representative Joey Salceda, who also chairs the ways and means committee of the Congress, the government should tax digital services such as Netflix, Facebook Ads, and Lazada to offset the ₱120 billion in lost revenue from the planned emergency measure to cut corporate income taxes to 25 percent.
The new measures will also be called “Netflix tax,” “Facebook ad tax,” and “Lazada tax,” respectively, the Philippine Daily Inquirer reports. This is in reference to the names of the biggest services in the proposed revenue-generating measures for each vertical. All these multinational digital platforms have their respective offices in the country.
Meanwhile, Salceda’s counterpart in the Upper House, Senator Ramon Revilla of the Senate ways and means committee, filed Resolution No. 410 that implores lawmakers to look into these as a way to bolster revenue collection by the government.
“We need to embrace the digital revolution of our time, and to comprehensively review and update our existing tax laws regarding digital economy,” Revilla said.
“Filipinos spend around four hours and 12 minutes on various social media platforms every day, nearly double the global daily average of two hours and 16 minutes. Filipinos spend at least 3.3 hours daily watching online content on mobile devices,” he added.
The three digital platforms, now more than ever, have become increasingly prominent in our lives. With the pandemic forcing most Filipinos to stay home, we become increasingly dependent on them. Is the digital economy taxation in the best interest of everyone?
Netflix tax and no chill
For Netflix, Spotify, and other media streaming services, Salceda wants the Congress to pass a law that will levy a 12-percent tax on their subscription services. According to the senator, the ₱5-billion local market doesn’t give the government its fair share of the revenue.
How does the digital economy taxation for on-demand streaming services work? When you pay your monthly subscription, the payment collected by these companies go straight to their pockets. For instance, Netflix’s ₱149 smartphone-only plan is purely lining the pockets of the streaming giant throwing anything to the government.
With added tax, expect a 12-percent additional fee in your streaming service pricing, an amount that will make it more expensive than your usual payment. For example, the ₱149 plan with a 12-percent Netflix tax will cost you around ₱166.88, provided that it’s the only way they will put taxation the service.
Aside from Netflix, this can apply basically to any streaming service you have right now. Spotify, Apple Music, Amazon Prime Video, HBO GO—you name it. Even the most obscure platforms are also subject to digital economy taxation to the government when they operate here.
However, we’re not the only ones mulling on taxing these services. Just recently, the Indonesian government approved a measure that will slap 10-percent value-added tax (VAT) on paid web-based media services, effectively starting the collection on July 1.
According to taxation automation software maker Quaderno, digital tax is already in effect in countries like South Korea, Japan, the United States, Taiwan, European Union members, and a few more. Meanwhile, Thailand, Canada, Colombia, and a few more countries including the Philippines are already mulling this measure.
Statista, meanwhile, says there are more than 300,000 active streaming subscribers on Netflix in 2020 alone, with a 500-percent increase from the total number of subscribers from 2017. One year after Netflix opened its doors to the Philippine market, Netlix garnered 48,680 paid subs, with the average amount of subscription at ₱381.50.
If the government starts collecting revenue from that market, a 12-percent VAT from all the Netflix subscriptions alone will give them around P13.7 million. And that’s for Netflix alone.
Digital economy taxation for digital advertisers?
Just like the “Netflix tax,” Salceda wants to charge all ads with 12-percent VAT as well as corporate tax by requiring “that digital advertisements be made through a country representative of Facebook and Google so it becomes least problematic.”
“The big money is in finding a way to tax the advertising on Facebook and Google,” he said.
In the Inquirer report, Salceda said that the basis for the idea of collecting Facebook and Google tax is based on the op-ed piece written by economist and Nobel laureate Paul Romer.
Based on Romer’s proposal published on the New York Times, digital ads should be slapped with a surcharge on top of the corporate income tax. In addition, he proposed a progressive schedule for taxing digital ads to allow the big companies—primarily Google and Facebook—to “bear the brunt of the tax.” This will allow smaller digital companies to enter the market with ease.
Value-added tax for Lazada, Shopee sellers
Another target within the crosshairs of Salceda is the e-commerce sector, which is primarily dominated by Lazada and Shopee. Just like the two digital sectors mentioned above, the lawmaker wants every seller on the platforms to be subject to digital economy taxation.
To make this happen, Salceda wants the platforms to act as the “withholding tax agents” by automatically adding the 12-percent VAT to the total price of the goods to be purchased from the online marketplaces. This way, tax collection from sales in the sector will be more streamlined. Whether the seller is based outside of the country or not, any purchase made in the Philippines will already be imposed with a VAT.
Based on the figures from the congressman, only 50 percent of sellers in Lazada, Shopee, Aliexpress, and others pay VAT “since they are large taxpayers and accredited shops.”
Although one of the requirements to be listed in these platforms is having a Bureau of Internal Revenue (BIR) registration—as well as other business documents—some sellers incorrectly declare their sales from these as they are not strictly monitored.
Is the digital economy taxation measure anti-consumer?
The government has long been toying with creative ways to slap taxes on digital goods and services. In 2013, the Bureau of Internal Revenue issued Revenue Memorandum Circular No. 55-2013, reminding the taxpayers of their obligations to the government even when conducting their businesses online.
However, the measure is just using existing tax laws to apply to products and services in online transactions, favoring restrictions rather than letting web-based platforms innovate and embrace technological changes. However, the circular doesn’t give the government the fangs to actively monitor online transactions and punish those who are avoiding to pay their dues.
A 2019 report from the Philippine Star said that the revenue collection agency is looking at ways to add the digital economies to its tax base, since every transaction made online is currently not covered by any tax law. Department of Finance (DOF) Assistant Secretary Antonio Lambino II said that proper tax regulations for online markets should be passed by the government to increase its revenue generation.
“We also have to tax the digital economy. We have to capture them, pay the taxes. Because what is happening now is, we will go online, we will order, and anything we can order, we can get. There’s no receipt, we don’t pay taxes to the BIR,” Lambino said.
Streaming platforms have basically made piracy almost a thing of the past, thanks to the convenience they offer and relatively cheap service. In 2019, an article from the New York Magazine said that piracy is likely to be back with other media platforms trying to take a slice of Netflix’s dominance.
Other media giants like Disney (Marvel, Fox, Lucasfilm, and others) AT&T (HBO, Cinemax, Warner Bros., DC Comics, The CW), and Comcast (NBCUniversal, DreamWorks, etc.) are launching their own platforms, effectively pulling their licensed content from Netflix.
With these companies seeing more profit by pooling their content and launching their own service, customers will either be forced to make multiple subscriptions or stick to their current one and just make do of their subscription’s decimated catalog.
If you add additional taxes in the mix, chances are piracy will be stronger than ever in hopes of catching up with their favorite shows without paying for another subscription. After all, why pay for something that’s already free, despite being littered with ads and potential malware?
As for taxing digital ads, Advertising Age published a strong counterargument to the idea floated by Romer. In an op-ed penned by Interactive Advertising Bureau Vice President Dave Grimaldi, he said both advertisers and consumers will greatly suffer from this proposal. Companies who rely on ads to get customers will be forced to raise prices to offset their lost income from digital ad taxes—and it will be the consumers who will ultimately take the biggest hit.
In addition, smaller companies who use online advertising platforms to reach a broader market will have a harder time competing with bigger companies with larger war chests for marketing and advertising. Since Facebook and Google ads rely on real-time bidding of their advertising inventory, more expensive ads will raise the barrier of entry for all business, including small players.
Finally, ecommerce taxation is a tricky one. Although it is highly favorable to tax sales on online markets, person-to-person platforms for used goods like Facebook Marketplace and Carousell should be exempted from this. Ever since the heyday of now-defunct Multiply, crafty sellers have been trying to dodge the law and earn uncut revenues from their sales. This is the perfect time to put an end to that—with certain freedoms of course.