The Bureau of Internal Revenue (BIR) has implemented a new withholding tax rule that impacts online sellers. This ruling affects how online sellers receive their earnings for goods and services sold and paid through online platforms and facilities.

A one percent withholding tax will be applied to the gross remittances made by e-market operators and digital financial services providers (DFSPs) to online sellers.

This BIR new ruling on online sellers officially took effect on January 11, 2024, and supports the agency's efforts toward a more efficient and fair tax administration. This initiative also helps the government take advantage of the country's growing e-commerce and online business industries.

With this new withholding tax rule, all businesses involved with online marketplaces and digital financial services must understand the regulation to ensure smooth operations and compliance with the BIR.

Read on to learn how this withholding tax works and how it could affect you as in online seller.

Last December 21, 2023, BIR issued Revenue Regulations No. 16-2023 (RR No. 16-2023), imposing a one percent withholding tax (WHT) on half of the gross remittances that e-marketplace operators and digital financial services providers (DFSPs) pay to online sellers or partner merchants.

Gross remittances refer to the money an e-marketplace operator or DFSP receives from buyers through a platform or a payment facility, such as e-wallets or banks, which is then paid to online sellers.

Meanwhile, sales returns or discounts, shipping costs, value-added tax (VAT), and any fees related to platform usage are excluded from gross remittances.

In addition to online sellers, the withholding tax rule applies to other businesses using DFSPs or offering online payment methods, including websites and even physical stores that allow digital money transmissions (i.e., e-wallets and online banking).

Contrary to what entrepreneurs might think, this withholding tax is not a new or additional tax burden to sellers. Instead, WHT is just a way for the BIR to collect your existing income taxes in advance, including income from online sales.

In the current tax scheme, businesses designated by BIR as Top Withholding Agents (TWA) already collect WHT on all regular suppliers' purchases. Simply put, the recent RR No. 16-2023 merely ensures the inclusion of online businesses and the usage of digital platforms in the same withholding tax system.

Businesses should also know that the tax withheld from the business is creditable against their income tax liability. In short, WHT is a way for you to pay your income tax dues bit by bit through every sale instead of paying a large sum of taxes every quarter-end.

Since WHT is essentially just an advanced tax collection, online sellers do not need to increase their prices to cover it. However, some sellers may mistakenly perceive WHT as an additional cost and pass this burden on to their customers by raising prices.

Your digital or online business may still be exempted from this withholding tax rule under the following conditions:

• Your total gross remittances for the past year didn’t exceed ₱500,000;
• Your total gross remittances for the current taxable year haven’t exceeded ₱500,000;
• Your business is exempted from taxes or subject to a lower tax rate due to an existing tax law or treaty. Some instances for tax exemption are if your business is a registered Barangay Micro Business Enterprise (BMBE) or if your personal taxable income is below ₱250,000.

When the gross remittances to your online business exceed the ₱500,000 limit, the e-marketplace operator or DFSP now must withhold a one percent tax on half of the gross remittances.

The computation of withholding taxes depends on whether the business is subject to VAT or is exempt. Here are examples of how to compute withholding taxes:

In this example, the marketplace operator or DFSP will withhold ₱3.10 from the business, leaving P616.90 for remittance to the seller.

From this example, the marketplace operator or DFSP will withhold ₱2.74 from the business, leaving ₱544.94 for the remittance to the seller, exclusive of VAT.

After the issuance date of the new RR No. 16-2023, e-marketplace operators and DFSPs have until July 14, 2024, to adjust and make changes concerning the new tax rule.

These changes include collecting the necessary documents from their partner merchants and creating internal systems to ensure full compliance with the regulation.

Similarly, online sellers or businesses using digital platforms must comply with the registration and reporting requirements stated in RR No. 16-2023 before the deadline window ends.

E-marketplace operators and digital financial services providers (DFSPs) must withhold one percent tax on half of the gross remittances. But who are these parties involved?

According to the BIR regulation, e-marketplace operators connect online buyers to sellers, facilitate and conclude sales, process payments through the platform, and provide logistics or post-purchase support. Some of these e-marketplace operators are:

• Online shopping platforms (i.e. Shopee, Lazada)
• Food delivery platforms (i.e., foodpanda)
• Booking platforms for lodging accommodations (i.e., Agoda, Airbnb)
• Other similar online marketplaces

On the other hand, DFSPs refer to financial technology provided by digital service providers accessed through the internet, mobile apps, or similar means. DFSP services include:

• E-wallet services (i.e., GCash, Maya)
• Online banking or credit cards
• Insurance and insurance-related services

E-marketplace operators and DFSPs should track seller payments, deduct any necessary fees, and withhold the one percent tax before giving the remaining money to the sellers. The operators and DFSPs then remit the WHT to the BIR.

Sometimes, the buyer uses a certain DFSP to hold their money (Issuer) and sends the payment to a different provider (Acquirer). In this case, the Acquirer should withhold the taxes for the transaction since they remit the money to the seller. For example, if a buyer uses an e-wallet to send payment to the store’s bank account, the bank is liable for collecting the WHT.

Apart from withholding taxes, the e-marketplace operators and DFSPs must also secure documents from online sellers, ensuring they’re BIR-registered and confirming if RR No. 16-2023 covers them. These requirements are:

• Certificate of Registration (COR)
• Certification of tax exemption or entitlement to a lower tax rate
• BIR-received Sworn Declaration (SD) that their income does not exceed ₱500,000

Once a seller is registered with the platform, the operator or DFSP can start collecting WHT when one of the following conditions are met:

• Seller submits an SD declaring income or remittances above ₱500,000
• Seller fails to submit an SD stating their income doesn’t exceed ₱500,000
• The operator or DFSP ascertains that the business’s gross remittances have exceeded ₱500,000

Lastly, e-marketplace operators and DFSPs must provide BIR Form 2307 to the sellers as proof of tax withholding.

Since the pandemic, more Filipinos have started online businesses through social media accounts or e-commerce platforms like Shopee or Lazada.

Because online businesses are still relatively new in the Philippines, the government is strengthening regulations to cover them. Despite this, many online merchants mistakenly believe they are not required to pay withholding tax or any tax for that matter.

However, just like any traditional brick-and-mortar enterprise, online sellers must still comply with the legal requirements of running a business. More importantly, these sellers still need to pay taxes on their income, just like any other business owner

Therefore, as an online seller, you must register your business with the BIR and provide a copy of the COR to the e-marketplace operator or DFSP before using their platform. If applicable, also submit a certification showing eligibility for tax exemption or a lower tax rate to avoid paying the WHT.

Aside from the proof of tax registration, sellers should submit the following to the e-marketplace operators or DSFPs:

• Sworn Declaration (SD) that their gross remittances don’t exceed ₱500,000
  When to submit: Upon application as a seller or before July 14, 2024, and annually by January 20, thereafter
• SD declaring remittances over ₱500,000
  When to submit: As soon as the business’s income exceeds the ₱500,000 threshold
• The operator or DFSP ascertains that the business’s gross remittances have exceeded ₱500,000

It’s crucial to note that the ₱500,000 limit on remittances applies to the same business tax entity, meaning that if you have several shops under one tax entity or BIR-registered trade name, these shops will share the same ₱500,000 threshold.

Finally, remember to secure your BIR Form 2307 or withholding tax certificate to claim your withholding tax credits and lower your remaining tax dues.

Watch this video for more insights on how to minimize tax liability:

In addition to complying with legal obligations, online sellers must ensure a smooth and secure shopping experience for their customers.

Here are some tips to build trust and a thriving online presence:

• Display accurate prices that comply with the consumer protection act.
• Ensure products match the description, specifications, and any advertised information.
• Respect customer data privacy.
• Clearly display the business name, address, contact info, and other identifying details so buyers can verify the legitimacy of the business.
• Implement a clear and accessible system for handling customer complaints.
• Provide paper or electronic invoices/receipts for all transactions.

Imposing the one percent withholding tax on online sellers is a big step toward modern taxation in the Philippines. This measure not only includes the rapidly growing online market but also simplifies tax collection through a more streamlined process.

With the continuous growth of the digital and online economy, businesses, e-marketplace operators, and DFSPs must adapt to regulation changes and ensure compliance.

If you need more guidance on how the new withholding tax rule affects your online business or want to stay on top of regulation changes, don’t hesitate to ask tax pros like OneCFO for help!

With OneCFO, you’ll get access to world-class, CFO-level financial insights perfect for all your tax planning needs at an affordable cost.

In addition to keeping your business informed about evolving tax regulations, OneCFO’s team of experts will assist you in developing tailored strategies to seamlessly adapt to these changes, enabling you to capitalize on potential benefits while maintaining compliance.

Visit us at onecfoph.co or reach out to us at [email protected] to discover how our outsourced CFO services can empower your business to adapt and thrive in the face of tax changes.

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