D R A F T (Send comments to [email protected])

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1 D R A F T (Send comments to [email protected]) REPUBLIC OF THE PHILIPPINES DEPARTMENT OF FINANCE BUREAU OF INTERNAL REVENUE Quezon City REVENUE REGULATIONS NO. SUBJECT : Tax Treatment of Transactions Through Electronic Commerce. TO : All Internal Revenue Officers and Others Concerned. Pursuant to the provisions of Section 244 of the National Internal Revenue Code of 1997, in relation to Republic Act (R.A.) No. 8792, otherwise known as the Electronic Commerce Act, these Regulations are hereby promulgated to govern the tax treatment of certain transactions made through an electronic data message or electronic document. SECTION 1. Definition of Terms. - For purposes of these Regulations and the revenue memorandum orders and circulars to be issued by the Commissioner of Internal Revenue pursuant thereto, the words and phrases herein provided shall be understood to mean as follows: 1.1 Electronic Commerce. - For purposes of these Regulations, the term "Electronic Commerce" means doing business through the facilities of the Internet web site. 1.2 Commercial Activities. - Shall be given a wide interpretation so as to cover matters arising from all transactions of a commercial nature, whether contractual or not. The term shall likewise refer to acts, events, transactions, or dealings occurring between or among parties including, but not limited to, factoring, investments, leasing, consulting, insurance, and all other services, as well as the manufacture, processing, purchase, sale, supply, distribution or transacting in any manner, of tangible and intangible property of all kinds such as commodities, goods, merchandise, financial and banking products, patents, participations, shares of stock, software, books, works of art and other intellectual property. 1.3 Non-Commercial Activities. - Are those not falling under the term "Commercial Activities."

2 1.4 Service Provider. - Refers to a provider of online services or network access, or the operator of facilities therefor, including entities offering the transmission, routing, or providing of connections for online communications, digital or otherwise, between or among points specified by a user, of electronic documents of the user's choosing; or the necessary technical means by which electronic documents of an originator may be stored and made accessible to a designated or undesignated third party. Such Service Providers shall have no authority to modify or alter the content of the electronic document received or to make any entry therein on behalf of the originator, addressee or any third party unless specifically authorized to do so, and who shall retain the electronic document in accordance with the specific request or as necessary for the purpose of performing the services it was engaged to perform. 1.5 Internet Service Provider (ISP). - An ISP provides access to the Internet plus valued-added services, such as web site hosting, to individuals and business entities. 1.6 Internet Access Provider (IAP). - An IAP is a company that provides a person access to the Internet. This is done by connecting a personal computer to the provider's remote computer to make the connection. Some access providers are large commercial services that also offer proprietary content. Others are small local or regional companies that offer Internet access only. 1.7 Electronic Document. - Refers to information or the representation of information, data, figures, symbols or other modes of written expression, described or however represented, by which a right is established or an obligation extinguished, or by which a fact may be proved or affirmed, which is received, recorded, transmitted, stored, processed, retrieved or produced electronically. Throughout these Regulations, the term electronic document shall be equivalent to and be used interchangeably with electronic data message. 1.8 Electronic Signature. - Refers to any distinctive mark, characteristic and/or sound in electronic form, representing the identity of a person and attached to or logically associated with electronic data message or electronic document or any methodology or procedures employed or adopted by a person and executed or adopted by such person with the intention of authenticating or approving an electronic data message or electronic document. 1.9 Electronic Data Message. - Refers to information generated, sent, received or stored by electronic, optical or similar means, but not limited to, electronic data interchange (EDI), electronic mail, telegram, telex or telecopy. Throughout these Regulations, the term electronic data message shall be equivalent to and be used interchangeably with electronic document Computer. - Refers to any device or apparatus singly or interconnected which, by electronic, electro-mechanical, optical and/or magnetic impulse, or other means with the same function, can receive, record, transmit, store, process, correlate, analyze, project, retrieve and/or produce information, data, text, graphics, figures, voice, 2

3 video, symbols or other modes of expression or perform any one or more of these functions. Other technical terms which are defined in R.A. No and its Implementing Rules and Regulations are hereby adopted for purposes of uniformity and harmony. Section 2. - Electronic Commercial Activities. - For purposes of these Regulations, any person engaged in commercial activities in the Philippines through the facilities of the "Internet" shall be treated as engaged in Electronic Commerce transaction. 2.1 Scope. - Electronic Commerce Transactions Through The Facilities Of The "Internet," Explained. - The Internet is a world-wide network of computers and connections that uses a common communications language. This communications language provides a common link that enables individual computer systems to interact with one another. Individual computers are linked to Internet Service Providers (ISPs) such as, but not limited to, America Online, a US ISP, etc., or to local ISPs, by a combination of wired (i.e., telephone, Local Area Network [LAN], or cable) and/or wireless technology. These ISPs, in turn, connect to the Internet Backbone, a largecapacity, high-speed, telecommunications network. The basic layout of the Internet consists of (1) individual users who connect to ISPs, most often through dial-up telephone lines, cable or satellite; and (2) institutional users - such as universities, governments, and large commercial entities - which generally connect to ISPs using dedicated wiring such as LANs or leased telephone lines. The ISPs are then linked to a regional or mid-level network which, together with other regional networks, connect to a "Major Point of Presence" (MPOP). These MPOPs are linked at very high speeds to create the Internet Backbone. The US Internet Backbone connects to other Backbones around the world. Links to Internet web sites, to individuals, sales transactions, and other uses of the Internet go through these networks and commercial service providers. 2.2 Digitized Information Products, Explained. - One of the important and unique characteristics of Internet technology is its ability to transform vast quantities of information from physical (i.e., tangible) into digital (i.e., intangible) form. As a result, virtually any product which is based on information can be sold, transferred, or conveyed through the Internet. The process of reducing such items to pure information, or by digitizing them, transforms the same into an intangible form. Examples of transforming tangible goods into intangible goods include the digitization of music, computer software, graphics programs, books, movies and data bases. For example, a piece of book, which is written in paper, is a tangible personal property. Hence, its sale or disposition is a sale or disposition of a tangible personal property rather than a sale of personal service. Under Internet technology, such book may be sold and disposed in book form (i.e., in a paper based book), in which case, it is treated as a tangible personal property, or it may be sold and disposed in a digitized form, i.e., the seller simply electronically downloads the digitized book to the buyer's personal computer, in which case, it is transformed into electronic form, which is an intangible 3

4 personal property. In this latter case, the buyer may either go over and read this book directly from his personal computer, or actually reproduce and print the same into a hard copy, that is, in a paper based book. 2.3 Treatment of Digitized Information Products for VAT Purposes. - Digitized information products shall be treated as an intangible personal property right. Any payment to a non-resident of the Philippines as a consideration for any digitized information product such as, but not limited to, music, computer software, graphic programs, books, movies, or data bases which the said non-resident owner downloads to the personal computer of a resident of the Philippines, whether a VAT or a non-vat registered person, for the latter's use shall be imposed with the creditable 10% VAT withholding, pursuant to the provision of Section 114 (C) of the Code, as follows: xxx Provided, further, That the payment for lease or use of properties or property rights to non-resident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For this purpose, the payor or person in control of the payment shall be considered as the withholding agent. "The value-added tax withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made." The digitized information product shall be treated as the intellectual property or property right of the aforesaid non-resident person. The aforementioned resident person shall, in turn, be treated as the lessee or licensee with respect to the lease or use of the said intellectual property or property right of the said non-resident who shall, accordingly, be considered as a withholding agent in respect of the 10% VAT due from the said non-resident. The aforesaid resident person shall, before making payment, withhold and remit the 10% VAT due thereon by filing a VAT return in his capacity as a withholding agent, for and in behalf of the said non-resident-payee. (a) IF VAT WITHHOLDING AGENT IS A VAT REGISTERED PERSON. - The 10% VAT so withheld and remitted to the BIR shall be treated as the said withholding agent's input tax which shall be available for credit against his output taxes. (b) IF VAT WITHHOLDING AGENT IS A NON-VAT REGISTERED PERSON. - The 10% VAT so withheld and remitted to the BIR shall be treated as the said withholding agent's cost or expenditure for income tax purposes: Provided, however, that whether or not he may be allowed to claim the same as deduction for income tax purposes shall depend on whether or not the corresponding requisites for its deductibility, under the income tax law and regulations, have been complied with. 4

5 SECTION 3. Situs of Transaction and Income Therefrom In General. - Unless otherwise provided in these Regulations, any person who, in the course of his trade or business, sells, barters, exchanges, or leases goods or properties, or renders services within the Philippines, and any person who imports goods into the Philippines, shall be subject to the value-added tax, percentage tax, or excise tax, whichever tax type/s may be applicable as provided in the National Internal Revenue Code of 1997 (hereafter referred to as the "Code"): Provided, however, that in the case of sale, barter, exchange or lease, the transaction shall be treated within the Philippines if made by a person who has physical presence within the Philippines, regardless of the country or state or place where title to the goods or property sold had passed, the parties' agreement to the contrary notwithstanding: Provided, further, that in the case of importation of goods, the tax shall apply whether or not the importation into the Philippines is made in the course of the trade or business of the importer. The term "goods" in this Section means "tangible personal property." Accordingly, the term "goods" does not include "intangible personal property." Situs of the Transaction and Income Therefrom; Physical Presence Rule. - In general, a transaction, including the income derived therefrom, shall be treated as arising from within the Philippines if made by a person who, in the course of his trade or business, maintains or keeps his physical presence within the Philippines, either by himself or through his personnel or agent. If such person maintains, keeps or operates a warehouse, or a place of distribution, or any establishment of similar nature or character, located within the Philippines, in the conduct of his trade or business, whether operated by himself alone or through his personnel or agent, he shall be treated as having a physical presence within the Philippines. This rule shall apply regardless of the number of personnel or agents employed by the said person in the conduct of his trade or business within the Philippines: Provided, however, that, in general, a non-resident of the Philippines who transacts his business through his Internet web Site but who does not keep or maintain any warehouse, or a place of distribution, or any business establishment of similar nature or character located within the Philippines, shall not be treated as having a physical presence within the Philippines. Illustration: (a) With Physical Presence In The Philippines. - "ABC CORPORATION." A foreign corporation engaged in general merchandising business in the Philippines, sells its merchandise through its Internet web site, with the PACIFIC CORPORATION as its Internet Service Provider (ISP). Its Internet Domain name is Its merchandise distribution center is located at No. 8, Abella St., Antipolo, Metro Manila. It imports its inventories and sell the same to the general public. Sales to customers are made through its Internet web site, as follows: The customer, through his personal computer, accesses ABC CORPORATION's Internet web site and makes his purchase. The customer pays for his purchase through his Visa Credit Card. After the customer's payment, ABC CORPORATION issues an electronic 5

6 invoice covering the transaction and forthwith delivers the merchandise, out of its warehouse in Antipolo, to the said customer. In this case, ABC CORPORATION is subject to value-added tax on its sale to the aforementioned customer because it has physical presence in the Philippines in the conduct of its trade or business, represented by its warehouse or distribution center in Antipolo, Metro Manila. Its income arising therefrom shall also be treated as derived from sources within the Philippines. (b) Without Physical Presence in the Philippines. - "XYZ CORPORATION, a foreign corporation, is engaged in the business of selling goods world wide. Its principal place of business is located in California, USA. It sells its products to world wide customers through its Internet web site, with America Online as its ISP, using its Internet Domain name A customer in the Philippines, using his personal computer, purchased merchandise from XYZ CORPORATION, and paid for his purchase through his Visa Credit Card. After receipt of payment, XYZ Corporation issued an electronic invoice covering the said transaction, and forthwith shipped the merchandise to the Philippines, with the said customer as the consignee. In this case, XYZ CORPORATION shall be exempt from VAT on its aforesaid sale transaction because it has no physical presence within the Philippines, the fact that its Internet web site is accessible through the personal computers of customers in the Philippines notwithstanding. However, the said Philippine customer is constituted as importer of the said goods and shall be the person liable for the VAT, if any is due on his importation, pursuant to the provisions of the Code. In the same vein, the income of XYZ Corporation arising therefrom shall be treated as derived from sources without the Philippines. SECTION 4. - Keeping, Conversion, and Retention of Taxpayer's Conventional Paper Based Book of Accounts and other Underlying Accounting Records in Electronic Form In General. - In general, any taxpayer may opt to keep his book of accounts and other underlying accounting records in electronic form, in lieu of the conventional paper based documents: Provided, however, that such taxpayer has duly complied with the administrative procedures as the Commissioner of Internal Revenue may, by Revenue Memorandum Order or Circular, require. Such administrative procedures shall include, but need not be limited to: (a) Prior application by the taxpayer to keep the aforesaid records in electronic form; (b) Prior determination by the Commissioner or his duly authorized representative on the integrity and qualification of the electronic recording, filing and preservation of the aforesaid accounting records; 6

7 (c) That the aforesaid electronic files shall be readily accessible to the BIR for purposes of tax audit; (d) That the Commissioner or his duly authorized representative may secure a copy of the taxpayer's electronic file (e.g., in floppy disc or in magnetic tape), or in hard copy; and (e) Such other administrative procedures as may be necessary to guarantee the integrity of the taxpayer's electronic files. The Commissioner may prescribe in the aforesaid revenue memorandum order and circular such conditions as may be necessary for the effective implementation of the purposes for which these Regulations have been promulgated. 4.2 Conversion and Retention of Paper based Accounting Records into Electronic File. - In general, any taxpayer shall have the option to convert or transform his conventional paper based book of accounts and other underlying accounting records into electronic files subject, however, to compliance with the following conditions: (a) Prior application by the taxpayer for authority to convert or transform his aforesaid records into electronic files; (b) Prior determination by the Commissioner or his duly authorized representative of the integrity and qualification of the electronic filing systems that the taxpayer shall adopt; (c) Prior issuance of a Permit from the Commissioner or his duly authorized representative for the conversion or transformation of the said records into electronic files; and (d) Such other conditions as the Commissioner may prescribe to guarantee, if not safeguard, the integrity of the conversion or transformation of the data into electronic files, in particular, and, in general, for the effective implementation of the purposes for which these Regulations have been promulgated. SECTION 5. Penalty Clause. - Any violation of the provisions of these Regulations, including the provisions of the aforementioned memorandum orders and circulars issued by the Commissioner pursuant to the provisions of these Regulations, shall be punishable under Section 275 of the Code, imposing a fine of not more than P1, or imprisonment for not more than six (6) months, or both, upon conviction of the offender, at the discretion of the Court: Provided, however, that in case any specific violation of the offender is embraced by a specific penalty prescribed in the Code, then the imposition of such specific penalty shall prevail. SECTION 6. Repealing Clause. - Any revenue issuance, if inconsistent herewith, is considered repealed, amended, or modified accordingly. 7

8 SECTION 7. Effectivity Clause In general, the provisions of these Regulations shall take effect fifteen (15) days after publication in the official Gazette or in any newspaper of general circulation. 8.2 The revenue memorandum orders and circulars that may be issued by the Commissioner pursuant to the provisions of these Regulations shall be similarly published and shall take effect fifteen (15) days after such publication: Provided, however, that any provision in the aforesaid Order or Circular which is already so provided in these Regulations shall be treated effective fifteen (15) days after publication of the aforesaid Regulations. JUANITA T. AMATONG Secretary of Finance Recommending Approval: GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue 8