Catching up with digital economy

by Boo Chanco (The Philippine Star), 22 May 2020

The head of an association of cable television operators accused ABS-CBN of using five channels even if it only had one franchise. She thinks every channel needs a franchise.

But ABS-CBN was just using the same frequency allocation it had when it was broadcasting in analog. With the introduction of digital technology, it could use the same frequency to broadcast five different channels.

The threat to the business of cable operators is advancing technology. In many countries today, cable operators are shutting down because people have better tech options to the community antenna service. Netflix, for instance… plus a sports and a news channel.

It is unfortunate we are so far behind the tech revolution. Our laws are not updated to properly regulate new technology. Our Public Service Law is so outdated it still charges a fine of P200 a day for violations.

We could have more competition in the provision of broadband services driving better services, but Congress has not passed the Open Access proposal that had been pending for years. We are operating under a Ramos era EO designed to break the Philcomsat monopoly for access to satellites that, however, grants telcos the same exclusive right.

If the Open Access Law is passed, the playing field will be leveled and smaller players can access satellites to get into the broadband business without having to go through a telco. Our antiquated laws and rules prevent a more competitive industry from coming to life.

Our failure to keep up with tech developments has also resulted in our failure to collect the right taxes. Tech companies earn oodles of money virtually tax free. It is a worldwide problem, but a proposal of Rep. Joey Salceda aims to fix it for us.

Salceda’s digital economy taxation bill (HB 6765) aims to raise P29.1 billion new revenues to help fill the coronavirus disease 2019 or COVID-19 gap without new tax burdens on ordinary Filipinos. Salceda wants to capture the value created by the digital economy better in the country’s tax system.

Salceda is proposing to plug loopholes due to ambiguities in what kind of taxes digital services should pay.

“No new taxes here, we just want them to pay their fair share. Assuming you’re a company that sets up in the Philippines, and you do video-streaming or music-streaming services, you will definitely pay taxes. But companies like Netflix and Spotify don’t. That’s obviously not fair.

“Netflix earns P5 billion from subscriptions paid by Filipinos. Ok fine, why do Filipino firms like DCTV and Skycable pay VAT and income taxes, and Netflix does not but it does in other countries like India, Indonesia and EU? Facebook and Google earn P50 billion from ads catering to and paid by Filipinos and they don’t pay VAT and income tax. Is that fair?” Salceda asked.

Actually, social media companies like Facebook are turning out to be moochers. Facebook uses content from newspapers like the New York Times and broadcast networks like ABS-CBN to attract readers. Facebook pays content generators little or nothing.

Facebook is eating everyone’s lunch. But content creators have no choice because they could lose a good number of readers and viewers if they don’t allow Facebook to do what it does now.

So, I am not surprised these digital companies are dodging their rightful share of taxes. The Europeans have been adamant in collecting taxes from these digital entities from income earned within their jurisdiction.

But there are many questions on how these companies with no physical presence in various territories earn from sales within those jurisdictions can be taxed.

“The existing tax system does not adequately capture the value creation and profit making of enterprises in the digital economy. It needs to be transformed to make it both fair and efficient in a digitalizing world,” an ADB paper observed.

The proposal of Salceda is timely for another reason. The Philippines acceded to the WTO Moratorium on tariffs on e-commerce or digital transactions. This expires on June 2020. It’s an old instrument from 1988 designed to help build a digital economy. But the world is so different now.

Then again, how can we tax the advertising and other income streams of Google and FB when they are not even allowed to engage in the media business under our Constitution? Shouldn’t we fix our Constitution first?

Joey is, nevertheless, certain we ought to do it and we can. In more specific terms, he proposes to:

Make “network orchestrators” like Grab, Angkas, and other similar services withholding agents for income taxes.

Clarify that services rendered electronically in the course of trade or business are liable to Value-Added Tax (VAT).

Clarify that digital advertising by internet giants such as Google and Facebook and subscription-based services such as those of Netflix and Spotify, are subject to VAT.

Make network orchestrators for lease services such as AirBnB, and electronic commerce platforms such as Lazada and Shopee withholding agents for VAT.

Require those who render digital services to do so through a resident agent or a representative office in the Philippines, to address the issue of companies having significant presence in the country without having a physical establishment in the Philippines not being liable for tax and regulatory purposes.

Of course, this tax proposal will not affect social media users who do not advertise on these platforms. We will not be the first to try to tax digital entities. Singapore is now imposing a GST on digital services since January this year. Malaysia did the same.

The ADB paper noted that “the major tool to respond to the development of the digital economy has been through VAT. For example, economies in Southeast Asia acknowledge the importance of e-commerce taxation in order to take advantage of growth and level the playing field between online businesses and those that operate offline.”

Salceda’s proposal is timely. But there are so many technical and legal details to figure out. At least we are making the first move to catch up with technology. Let’s do it!