Tax Articles

The New Withholding Tax Obligation

By: Atty. Jomel N. Manaig

Atty. Jomel N. Manaig Partner   +632 8403-2001 loc. 140 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

If you are a FinTech entity (i.e. e-marketplace operator and/or digital financial services provider) in 2023, you may have been looking forward to a worry-free end of year. However, following Murphy’s Law, anything that can go wrong will go wrong. That “anything” came in the form of Revenue Regulations (RR) No. 16-2023.

Transactions made using electronic platforms, either conducting the actual sale or facilitating its payment, have been largely kept untouched by tax rules and regulations. It was a new frontier and the BIR rules and regulations had not yet caught up with it. Well, that was until the BIR updated its withholding tax regulations to cover remittances by e-marketplace operators and/or digital financial services providers.

Essentially, subject to certain exceptions, one-half (1/2) of the gross remittances by e-marketplace operators and/or digital financial services providers to merchants are now subject to withholding tax at the rate of one percent (1%).

While it is certainly within the competence of the BIR to impose rules and regulations for the effective administration and collection of taxes, it seems that the rules and regulations governing the basic understanding and rudimentary tenets of withholding taxes are now changing and evolving. RR No. 16-2023 is proof of that.

Withholding taxes, as traditionally understood, is imposed on income payments. Certain buyers are expected to withhold a certain amount of their income payments to sellers and remit the same to the BIR. However, the recent regulation requires the e-marketplace operator and/or digital financial services provider to act as a withholding agent even though they are just facilitating the remittance or payment to the seller. To be clear, the e-marketplace operator and/or digital financial services provider is not the buyer of the goods/services so whatever it remits to the merchant is not technically an income payment.

On the flip side, the merchant is not selling anything to the e-marketplace operators and/or digital financial services providers so whatever amount the former receives from the latter is also not technically an income payment.

Nonetheless, the BIR imposed the burden on the e-marketplace operator and/or digital financial services provider to withhold the tax. This imposition now changes the dynamic of the basic concept of withholding taxes to include not only the actual income payment but also the remittance of the fund representing the payment of the buyer.

Following this new requirement, e-marketplace operators and/or digital financial services providers are now expected to track the aggregate amount of remittances to each merchant. In addition, since it is now considered a withholding agent, it would have to issue Certificates of Credible Tax Withheld at Source to all merchants affected by the withholding tax. Significant adjustments would have to be made by the e-marketplace operators and/or digital financial services providers in their systems and processes to accommodate this obligation.

Further, a peculiar scenario was provided in RR No. 16-2023 involving an online booking platform with payment made using a credit card. In such scenario, the BIR said that there are two (2) instances of withholding: (i) the credit card company shall withhold from the payment to the online booking platform; and (ii) the online booking platform shall withhold from the remittance to the concerned income payor (which was a hotel in the example in RR No. 16-2023).

Unlike previous withholding tax obligations wherein the supposed income payment was subjected to withholding tax only once, the new regulations now allow double withholding on the same income payment stream. Although the example in the regulations involved an online booking platform and a credit card company, the idea of double withholding appears to be applicable to other e-marketplace operators as long as the payment is made using a credit card. This is because credit card payments are subject to a separate withholding tax obligation.

While the intention to improve tax collection is admirable and even crucial for national development, a balance must be struck between effective tax administration and the uninvited burden it imposes on the unwitting withholding agents. If there are improvements that can be implemented in the current tax collection measures or if there is a more effective way of collecting taxes other than passing on the obligation to taxpayers, such avenues must be explored first.