REPUBLIC OF THE PHILIPPINES

DEPARTMENT OF FINANCE
BUREAU OF INTERNAL REVENUE
Quezon City
D R A F T
(Send comments to shirley.fellone@bir.gov.ph)
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."
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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.
1.10 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,
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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. 8792 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 large-
capacity, 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, e-mail 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
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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.
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SECTION 3. Situs of Transaction and Income Therefrom. -
3.1 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
www.abccorporation@pacific.net.ph. 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
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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 www.xyzcorporation@aol.net. 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. -
4.1 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;
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(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
P1,000.00 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.
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SECTION 7. Effectivity Clause. -
8.1 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