ONLINE BUSINESSES:

COLLECTION OF TAXES
REGULATION

Researchers:

Laigo, Diane Faye Pagulayan

Lopez, Ruby Geroy

Oandasan, Ronel Quevedo

Online Business: Collection of Taxes Regulation Page | 1

 Over the recent years, the Philippines have been rapidly advancing in the

field of business. The marketplace has been growing more complex and more

confusing for consumers to navigate. On the early days of the Internet, there

were many concerns regarding online shopping. E-commerce dates back to the

invention of the very old notion of buy and sell. It became possible in 1991

when the Internet was opened to commercial use. Since that date, thousands

of businesses have taken up residence at web sites to which the consumers

seem to prefer more as it is being the latest trend in shopping. Hence, as the

technologies are currently and persistently evolving, entrepreneurs are

aggressively continuous in the search for new innovations to seize the publics

interest and attention.

In the evolution of business, new technologies made it possible to

complete the entire process of the transaction, including: commercial request,

offer, purchase order and invoicing. In such a way, simplification of business

processes enables companies to significantly reduce their costs. For example,

according to Steinbock (2000)1, a process of the transaction through the

Internet reduces the costs of procurement of materials by 5-10%, inventory

costs by 25 50%, and the administrative costs of procurement, even up to

70%. These major developments in the field of information technology have also

been unceasingly fast which lead to the use of Internet as a vogue medium in

advertising commodities.

Entrepreneurs tenacity and awareness considered the Internet, which is

a global communication tool without any restrictions, as the perfect instrument

to be used not only in marketing products but also in conducting business

1 http://www.essaywriting.expert/the-benefits-of-online-business-essay/

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transactions, resulting to the existence of online business or electronic

commerce.

As per defined in the Revenue Memorandum Circular 55-2013 of the

Bureau Of Internal Revenue, online shopping or online retailing or

otherwise known as Online Business is a form of electronic commerce

whereby consumers directly buy goods or services from a seller over the

internet without an intermediary service2. An intermediary is a third party

that offers intermediation services between two trading parties. The

intermediary acts as a conduit for goods or services offered by a supplier to a

consumer, and receives commission therefore. In this case, the relationship

between the intermediary and the merchant shall be that of a principal-agent

relationship which shall be governed by their agreement including but not

limited to the amount of commission, manner of transmitting the same, etc.

However, in the following instances the intermediary service provider

shall be considered the merchandiser/retailer itself: a.) when consumers buy

goods or services from an intermediary service provider who controls such

collection of buyers payments, and thereafter receives commission from the

merchant/retailer, b.) when the intermediary markets multiple products for its

own account (considered retailer or merchandiser as to the said products).

(RMC No. 55-2013)

The sales of goods and services through online channels have grown

rapidly in the recent years. A lot of people have discovered the ease and

convenience of buying in the comfort of their own home, office, or even Internet
2 Revenue Memorandum Circular 55-2013

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cafes. From big to small-sized enterprises, business owners realized the

advantage of selling online and now almost every kind of business sells their

products or services in the World Wide Web. As presented by the data collected

by International Telecommunications Union (ITU) 3, Philippines ranks 5th to

Internet Population and Online Penetration survey having 36.24 % on the

Internet Penetration and 36, 046, 531 Online Population at 2013.

Furthermore, according to We Are Social's Digital4 report as of January 2015,

the Philippines leads in average "Time Spent on the Internet" through laptop and

desktop, and one of the highest via mobile worldwide.

From a global average of 4.4 hours/day, the Filipino spends an average of

6.3 hours/day online via laptop and 3.3 hours/day via mobile.

Even those who do not have physical stores were encouraged to sell

online upon realizing this trend. An online shop, e-shop, e-store, internet shop,

web shop, web store, online store, or virtual store evokes the physical analogy

of buying products or services at a bricks-and-mortar-retailer or shopping

center, have become unstoppable most specially through social media like

Instagram and Facebook.

According to the study about payment related on online buying as presented by

the data collected by the ThoughtBuzz 5 online, credit cards payments

dominated the system with fourty one percent (41%). Twenty two percent (22%)

3 http://www.huffingtonpost.com/jonha-revesencio/philippines-a-digital-lif_1_b_7199924.html

4 http://wearesocial.com/uk/special-reports/social-digital-mobile-worldwide-2014

5 http://www.slideshare.net/techglimpse/e-commerce-on-social-media-philippines-
2014

Online Business: Collection of Taxes Regulation Page | 4

of it were merely asking about their choices regarding their mode of payment.

Bank deposits next in rank with about sixteen percent (16%) of the customers

were inquiring about how they could deposit their money directly to the bank

without having to transact online. Followed by PayPal with nine percent (9%) of

the payment-related mentions were about customers requesting and/or asking

for establishments to incorporate PayPal into their payment system. Then, debit

cards with six percent (6%) of the mentions were inquiries about debit card

rejections. Subsequently, both cash on delivery and G-Cash only got three

percent (3%) with customers recommending online stores who have cash on

delivery (COD) feature to their online followers and small amount of discussion

online was about G-Cash, with the netizens asking if they could pay for their

products through G-cash respectively.

Moreover, Filipinos are beginning to shop online, according to the results

of MasterCards Online Shopping Behavior Study 2012 6 in 14 Asia Pacific

countries. The survey also shows that the countrys e-commerce potential is

expected to grow even more with the emergence of enabling technologies.

Dominating the Philippine e-commerce landscape are local deals and

promo websites, although the most visited website is eBay (12.5%). It is

followed by Sulit (10.1%), Metrodeal (7.2%), Cebu Pacific (6.0%), Ensogo

(5.5%), and Amazon (5.1%).

Music download sites (43.9%) are the most visited in the Philippines,

followed by personal, education or professional development portals (40.3%),

and computer software websites (33.9%). Meanwhile, app stores registered the

6 www.business.inquirer.net/111455/more-filipinos-now-shopping-online

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highest amount of online spend, pegged at US$297, along with supermarkets

($245), and airlines ($195).

The study also reveals the rise in the category of ethical spending, with

78.6% of respondents buying certain items because they are environment-

friendly, up from 75.2% in 2011. In addition, 62.5% bought the product

because a percentage of sales were donated to a good cause, up from 54.6% in

2011.

The preference for local sites is due to fear of hidden charges, concerns

about security and speed of delivery, and the availability of most of the items in

local sites. In general, the Filipino online shopper is cautious in making online

purchases, with most of the respondents (89%) citing security as a top

concern, closely followed by speed of transaction (88.5%), convenience of

payment methods (88.5%) in their transactions. Other factors considered

important by 80% of the respondents are price/values, return or exchange

policy, website reputation, online review, customer service, low delivery

charges, and use of various payment methods.

Most respondents (79.5%) also plan their online purchases, up from

74% from 2011. This points to an online shopping behavior that is less

impulsive, except when it involved coupon/deal sites (triggering 28.8% of

purchases), and airline tickets (25.1%). To mitigate any perceived risks

associated with e-commerce, 81% of the respondents read online reviews.

Moreover, majority of the shoppers (77%) tend to go to the online shopping

sites they have used before.

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 In terms of gender, women tend to have more positive views, higher

involvement, and openness about online shopping than men, who are more

concerned about security issues. Interestingly, the men are most likely to shop

from and spend on foreign websites.

With respondents that cover the countrys 18 to 64 year-old population,

the study shows that 40.4% of Filipinos access the Internet to shop. For the

past three months, 64% of them purchased online, up from 2011s 61%, and

significantly higher than 2010s 38%.

While Filipinos currently rank lower than their neighbors in the

propensity to conduct online transactions, the countrys index of 71 has an

upward trajectory, rising by 7 points from 2011s 64, and 14 from 2010s 57.

The same is true for their online shopping satisfaction rating, which is at

86.1%, increasing from 82.6% in 2010 and 84.4% in 2011. Such a pattern

differs from the fluctuating or plateauing trends among the top scorers like

China, New Zealand, Australia, and Singapore.

Mobile commerce is a key area of growth, with the number of Filipinos

with in-mobile Internet access rising to 78.5% from 74.6% in 2011, and the

number of mobile-online shoppers doubling in the last 12 months: 21.4% in

2012 (versus 11% in 2011). The expansion of this market will be facilitated by

the availability of more apps (36.1%), which presumably assuage security

concerns, and come with the promise of being able to shop on the go (32.5%),

and convenience (27.8%).

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 In general, the report is strong on the prospects of e-commerce

advancing in the Philippines, as long as merchants and credit card and

payment solution companies more effectively promote the security of online

transactions.

The emergence of these concrete statistics paved the way for the

entrepreneurs to delve into the on-going trend in business. Expanding market

share in connection with the booming development of information technologies,

the entrepreneurs outweighed the pros and cons of online businesses basing it

towards the statistics that have been conducted.

According to Marketing Advice from Yells Business7, selling through an

online store, either alongside a conventional business or as a standalone e-

commerce venture, has several benefits. It reduces overheads in general, an

online shop costs less to set up and run than a physical store, although its

important to recognise that making e-commerce work requires continuing

investment. It lowers marketing costs with better targeting: online promotion

can be more precisely aimed at potential customers than using conventional

media. Its also much cheaper, for example, to send a marketing message by e-

mail to 1,000 customers than it is to send 1,000 newsletters by post. Engaging

business online expanded geographical reach: a local business can become

nationwide or, depending on the product, international, just through having an

effective e-commerce strategy. Being open for business 24/7 is an advantage.

With automated order and payment processing, sales can be made at any time,

and customers can buy when it suits them. Greater flexibility, an online store

can be updated instantly and as often as you like for example, to promote a

7 https://business.yell.com/knowledge/what-are-the-benefits-of-an-online-store-for-
businesses/

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deal of the day on your front page, without the need for expensive printed

display material. Broader potential customer base: an e-commerce business is

an additional buying channel, capable of attracting customers who have not

bought before. Improved customer profiling, with the opportunity to target

products and services at specific groups based on buying data. Increased

visibility for your business: with investment in search engine optimisation and

online promotion, an online shop becomes more accessible to customers

searching for your products. The ability to tell people about your business: this

is particularly valuable when an online store operates alongside a conventional

high-street outlet, providing information about opening hours, contact details

and answers to Frequently Asked Questions. Another marketing channel, your

online store can support your online marketing efforts by including customer

reviews and testimonials.

Enumerated buy eBay Philippines the advantages and disadvantages of

online shopping for consumers. Regardless of the geographic location, any

person could still successfully do business online, at any time of the day or

even extend the business transactions maximizing it 24/7 to accomplish sales

round-the-clock. Also, online business increases the list of opportunities for

the client. In contemporary business environment, it is a key factor of business

success to provide a customer with all kinds of information he needs, and

owing to the Internet technology, it is possible to realize a constant support for

customers in more efficient way. In such a way, the companys website should

not only contain a standard set of information about the company, its products

or services, but also to ensure effective communication between the

departments of the company, customers and suppliers. This, in turn, will

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increase customers satisfaction, which in turn will benefit the company in the

way of increasing the profitability of this kind of online business.

Engaging ones self in online transaction saves time. For instance, having

the specific list that you want to buy? With just a couple of clicks of the mouse,

you can purchase your shopping orders and instantly move to other important

things, which can save time. Saves fuel, the market of fuel industries battles

from increasing and decreasing its cost every now and again, but no matter

how much the cost of fuel are it does not affect your shopping errands. One of

the advantages of shopping online is that there is no need for vehicles, so no

purchase of fuel necessary. Saves energy, it is tiresome to shop from one

location and transfer to another location. What is worse is that there are no

available stocks for the merchandise you want to buy. In online shopping, you

do not need to waste your precious energy when buying. Comparison of prices,

the advanced innovation of search engine allows you to easily check prices and

compare with just a few clicks. It is very straightforward to conduct price

comparisons from one online shopping website to another. This gives you the

freedom to determine which online store offers the most affordable item you are

going to buy. Everyone hates waiting in lines. When buying items online, there

are no long lines you have to endure, just to buy your merchandise. The idea of

shopping online is cutting down those bad habits of standing in a long line and

just waiting. Every online store is designed with unique individual ordering

features to purchase the item. There are times that you want to purchase

something out of the ordinary that can be a bit embarrassing when seen by

other people. Items like weird ornaments, sexy lingerie, adult toys, etc. In

online shopping, you do not need to be ashamed; your online transactions are

basically done privately. Easy to search merchandise you want to buy. You are

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able to look for specific merchandise that includes model number, style, size,

and color that you want to purchase. In addition, it is easy to determine

whether the products are available or out of stock.

To continue, another benefit of online business is the availability of

information. For instance, many companies needed at least a few days to bring

information about the release of new products or some changes in

specifications to their customers just a few years ago. But everything has

changed with the emergence of online business because the Internet allows the

company to inform all the customers just in few hours by publishing news on

the own website.

In contrast, there are also disadvantages of online shopping. You cannot

personally check the item. Shoppers, who want to touch, see, and test the

product personally are not able to do this things so. Online stores are only

showing product description and photos of the merchandise, which can be a

disadvantage for many online shoppers. Also, it diminished instant satisfaction.

Unlike buying at retail stores, you are able to use the product instantly after

you buy it, which can be satisfying. However, online shopping requires patience

to wait for the item to arrive at your door step about 2 to 3 days or even longer

depending on the location you've ordered it from.

To make it simple, the Internet is a global communication tool without

any territorial restrictions; and the cost of access to information does not

depend on the distance from it, as opposed to a traditional business, where

this dependence is directly proportional. Thus, e-commerce enables even the

smallest suppliers to achieve a global presence, and to do business on a global

scale. Accordingly, customers also have the opportunity to select from all of the

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global potential of suppliers that offer the required products or services

regardless of geographic location. The distance between the seller and the

buyer plays a role only in terms of transport costs on the stage of delivery of

goods, and this moment allows online companies to calculate the own profits

and not to assess damages.

This rising trend of online businesses did not go unnoticed by the

Bureau of Internal Revenue in the tax bureaus attempt to increase collections

year after year. The Bureau of Internal Revenue stands by the law that states

all Filipinos earning income within the country are subject to pay

corresponding taxes. The bureau adds that online business offering goods and

services are no different from merchants with physical stores or offices, thus

must be subjected to paying taxes.

Taxation8 is the process or means by which the sovereign, through its

law-making body, raises income to defray the necessary expenses of

government. Expressed in another way, it is a method of apportioning the cost

of government among those who in some measure are privileged to enjoy its

benefits and must, therefore, bear its burdens.

One of the doctrines of taxation is that taxes are the lifeblood of our

country. Without tax collection, the government cannot be able to fund the

national expenditures, such as the construction of bridges, public schools and

hospitals, giving assistance to the poor, and the implementation of existing

laws and government programs that are aimed to protect and enhance the lives

of Filipinos.

8 The Law on Taxation Textbook by Hector S. De Leon, 2000

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 Income tax, which specifically be collected from the online business

owners and intermediaries, as defined by the Bureau of Internal Revenue 9, is a

tax on a person's income, emoluments, profits arising from property, practice of

profession, conduct of trade or business or on the pertinent items of gross

income specified in the Tax Code of 1997 (Tax Code), as amended, less the

deductions and/or personal and additional exemptions, if any, authorized for

such types of income, by the Tax Code, as amended, or other special laws.

The tax collected from different taxpayers, such as resident citizens

receiving income from sources within or outside the Philippines, employees

deriving purely compensation income from two or more employers,

concurrently or successively at any time during the taxable year, employees

deriving purely compensation income regardless of the amount, whether from a

single or several employers during the calendar year, the income tax of which

has not been withheld correctly (i.e. tax due is not equal to the tax withheld)

resulting to collectible or refundable return, self-employed individuals receiving

income from the conduct of trade or business and/or practice of profession,

individuals deriving mixed income, i.e., compensation income and income from

the conduct of trade or business and/or practice `of profession, individuals

deriving other non-business, non-professional related income in addition to

compensation income not otherwise subject to a final tax, individuals receiving

purely compensation income from a single employer, although the income of

which has been correctly withheld, but whose spouse is not entitled to

substituted filing.

That is why the Bureau of Internal Revenue (BIR), under the supervision

and control of the Department of Finance, was given the power and duty by the
9 http://www.bir.gov.ph/index.php/tax-information/income-tax.html

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government to assess and collect national internal revenue taxes and other fees

from the taxpayers or people who are required to pay taxes in the Philippines.

For employees, who are purely earning compensation income, their

income tax is usually withheld by their employers. That is why they may not be

bothered in preparing and filing their own tax returns, except on cases where

they are required to file their annual income tax return to the Bureau of

Internal Revenue. But for small business owners and self-employed

professionals, the burden of taxation is not only on spending money for tax

payment but also on spending time and effort in the process of registration,

bookkeeping, issuance of invoices, and preparation and filing of tax returns.

Now, the group of business owners, traders, sellers or professional

service providers can be further classified into two: the offline traders and the

online traders. Offline traders or sellers do most of their transactions without

Internet connection. They are usually the ones with existing physical stores or

place of business where they accomplish their sales and other business

transactions. With physically visible stores or offices, they are usually

monitored by the Bureau of Internal Revenue, which cause them to register

and comply with the Bureau of Internal Revenues various requirements, such

as bookkeeping and issuance of invoices to customers. On the other hand,

online traders are more complicated to be regulated and monitored by the

government since they are conducting transactions online which are paperless

and which leave lesser audit trail.

Theres also the application of Republic Act 8424, otherwise known as

Tax Reform Act of 1997, which was further amended, reiterates the promotion

of a sustainable economic growth through the Philippine internal revenue tax

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system, and provides, as much as possible, an equitable relief to a greater

number of taxpayers in order to improve levels of disposal income and increase

economic activity, also the creation of a robust environment for business, and

lastly, the assurance of the Government in providing for the needs of those

under its jurisdiction and care.

The fast-paced development of the business industry in the Philippines

slowly alters the existence of small and medium enterprises. As online business

portals continue to gain profit, in return, the shopping stores slowly deflates in

selling their products. Furthermore, when shopping stores and online business

portals go hand in hand, and then the occurrence of taxation goes in between,

would they weigh the same burden as the other?

The study will find out what will be the insights of the Bureau of Internal

Revenue on problems involving the imposition of fair taxes among online

businesses and small-medium enterprises, the regulation of the taxes being

imposed, the process of regulation of taxes and how they will respond to the

unwillingness of online businesses in terms of payment of taxes. It will also

determine the impact/s, if there are, the tax regulation on online businesses to

online business owners, so with the physically installed business owners. It will

also determine the effect/s, if there are, on prices of goods and services

available on the online and offline markets and to the customers or to end-

users. It will set out the process of the registration of online businesses. Also,

the requirements that must be complied with to acquire a legitimate online

business license (if theres one). It will also give information on what type of

good/s that will only be entered into online transaction focusing on the step-

by-step process of online transaction, the obligations of both online sellers and

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online buyers and the sanctions to be imposed on online business sellers on

the occurrence of illegal online transactions. Lastly, ascertain the possible

obligations of the following entities and intermediaries with regards to online

merchant / retailer, buyer / customer, payment gateway, credit card

companies, banks, freight forwarders, website administrator, advertising

entities, merchant / retailer relationship with online intermediary service.

In connection with the unwillingness of taxpayers to pay their

obligations, as ruled in the case of Luzon Industrial Corporation and Manila

Surety & Fidelity Co., Inc. versus Republic of the Philippines10, the laws

imposing penalties for delinquencies are clearly intended to, hasten tax

payments or to punish evasions or neglect of duty in respect thereof. If delays

in tax payments are to be condoned for light reasons, the law imposing

penalties for delinquencies would be rendered nugatory, and the maintenance

of the government and its multifarious activities would be as precarious as

taxpayers are willing or unwilling to pay their obligations to the state in time.

Therefore, online business is a new kind of economy with so enormous

pace of growth that it has already changed the very concept of a traditional

business and thus, it needs to be braced by taxation for our countrys

sustainable economic growth. Its emergence changed the flow of the business

industry because its availability to business enterprises is not limited, for this

does not necessarily need large enterprises in order to do successful business

in the Internet. Taxation is the system of ensuring that the government is able

to fulfil its self-demand duties to the people. However, since it is inherent to the

government to collect taxes from its clients citizens, it is imperative to the

Bureau of Internal Revenue, in collaboration with the Department of Trade and

10 http://www.lawphil.net/judjuris/juri1957/oct1957/gr_l-7992_1957.html

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Industry to monitor, supervise, regulate and collect taxes with fair assessment

from online businesses.

This study focuses on how the Bureau of Internal Revenue regulates the

assessment and collection of taxes from online business owners and even

intermediaries. This would show how stability is being maintained in terms of

competition between physically installed businesses and online generated

businesses and tax revenue collection equitable to them.

It would also serve as a guide and will give information to online

business owners on how the Bureau of Internal Revenue regulates taxes from

the income generated from their business venture. This will also be a basis for

future researchers with regards to gathering of information and data on how

the Bureau of Internal Revenue regulates taxes from business conducted

online. In the end, this study could be able to distinguish if ever there are

existing complications or inequality regarding the collection of taxes between

online businesses and shopping stores or businesses, and could acquire

relevant information on how the Bureau of Internal Revenue regulate the

collection of income tax from online business operators.

This study covers the collection of taxes from the online business owners and

intermediaries by the Bureau of Internal Revenue. Basing it to the sources

acquired through the Internet, this study shall continue to broaden its

boundaries as it further coordinate with the results that would be given

through relevant interviews to be conducted around Cagayan, specifically in

Tuguegarao City. Information relevant to the study will be coming from the

Bureau of Internal Revenue, Department of Trade and Industry, persons

engages in online selling and so with end-users, given that theres the

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nonexistence of past studies and laws to serve as a basis regarding the

regulation of the collection of taxes of online businesses.

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