When Taxes Go Online

Let’s face it, the internet has changed the way we live our lives. A majority of us nowadays would be unable to survive without it. In recent years, it has come to a point where almost everything one needs can be bought online. It has become so prevalent, especially in western countries, that online retail has put in danger the very existence of physical stores with some malls and physical stores closing shop.

 

 

In the Philippines, we have given our own unique twist on online retail. Unlike the giants like Amazon, Ebay, and Alibaba, there has been a proliferation of online stores selling anything and everything under the sun. Whatever you need, go online and I bet you’d find what you are looking for. It is the online version of our “tingi” economy. An online sari-sari store if you will.

 

In the past, very little attention was given to these online stores, especially by our taxing authorities. However, with the government imposing community quarantines all over the country forcing people to stay in their homes, the popularity and utility of online stores hit an all-time high. The underside of this rise in popularity is that it has come into the radar of the BIR. In recent months, calls have been made to tax these online stores/sellers. Expectedly, these calls have been met with staunch opposition from the online seller community. But I think there is a disconnect with the understanding here. Our tax laws provide for 0% tax rate. That’s right, if you fall under this category, your tax due would be…wait for it….ZERO. Let me explain.

 

Let’s focus only to income tax. Let us start with the basic question, who is liable to pay income tax. Section 23 (A) of the National Internal Revenue Code provides that “A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines.” Putting it simply, a Filipino residing in the Philippines must pay taxes for all income s/he earns anywhere in the world. What is income then? The Supreme Court answered this question way back in 1918 in the case of Madrigal vs. Rafferty (G.R. No. 12287, 08 August 1918). In that case, income was defined as the “flow of service rendered by capital by payment of money from it or any benefit rendered by a fund of capital in relation to such fund through a period of time.” Put it this way, your capital is say a mango tree. Any mango that tree bears is income. Given that said mango tree is growing in the Philippines or even when outside the Philippines but owned by a Filipino residing in the Philippines, then a part of that mango goes to the government.

 

Next question, how much tax do I have to pay then? This is where is gets tricky. The answer to this question relies on a formula. For example, you are selling something. Broadly speaking, to arrive at your payable tax, you take the amount of sales you’ve made, subtract the costs of producing/acquiring those goods as well as other expenses related to the sale of said goods and all the allowable deductions under the law, then multiply the difference to the tax rate applicable. To be more concrete about it, say for example you made Php 100,000.00 in sales in a given year but the expenses you incurred for producing/buying said goods or expenses for the sale and the allowable deductions add up to, say, Php 80,000.00. So, you subtract Php 80,000.00 from Php 100,000.00 leaving you with Php 20,000.00 net taxable income.

 

Now we go to the question, how do we determine the tax rate applicable to you? We will have to consult the National Internal Revenue Code, as amended for that. Sec. 24 of the Code provides for the tax rate for income of individuals as follows:

 

“(a) Tax Schedule Effective January 1, 2018, until December 31, 2022:

 

Not over P250,000 – 0%

Over P250,000 but not over P400,000 – 20% of the excess over P250,000

Over P400,000 but not over P800,000 – P30,000 + 25% of the excess over P400,000

Over P800,000 but not over P2,000,000 – P130,000 + 30% of the excess over P800,000

Over P2,000,000 but not over P8,000,000 – P490,000 + 32% of the excess over P8,000,000

Over P8,000,000 – P2,410,000 + 35 % of the excess over P8,000,000

 

Tax Schedule Effective January 1, 2023, and onwards:

 

Not over P250,000 – 0%

Over P250,000 but not over P400,000 – 15% of the excess over P250,000

Over P400,000 but not over P800,000 – P22,500 + 20% of the excess over P400,000

Over P800,000 but not over P2,000,000 – P102,500 + 25% of the excess over P800,000

Over P2,000,000 but not over P8,000,000 – P402,500 + 30% of the excess over P8,000,000

Over P8,000,000 – P2,202,500 + 35 % of the excess over P8,000,000”

 

Now that we know the rates, let us apply to our example. As stated earlier, the net taxable income is P20,000.00 after subtracting the expenses/allowable deduction from the sales. Looking at the table above, the net taxable income falls under the first category considering the amount is not over Php 250,000.00. Therefore, the applicable tax rate is 0% and multiplying that to Php 20,000.00 we get 0. Then your tax due would be zero.

Clearly, as can be seen in the example above, when the government said that it wants to tax online sellers, it does not automatically mean that all online sellers would have to pay income tax. What they mean is to formalize online sellers under this regime and for those earning a lot to pay their taxes. For those who have a net taxable income of at most Php 250,000.00 then there is no tax due.

This discussion, of course, focused solely on income tax. When doing business there are other taxes applicable, VAT, other percentage taxes, and local taxes are examples of this. But that is a discussion for another time.

 

Disclaimer: The information presented in this article is for informational purposes only. It should not be taken as a legal advice or be used a basis for legal action or defense.