The rise of electronics, telecommunications, computers, and the internet has paved the way for the digital revolution. Technological advancements in this new age entail digital democracy, gaming, mobile phones, the World Wide Web, online social networking, virtual communities, and virtual assets, among others. Information has become accessible to almost everyone, and the opportunities to render service and learn online have flourished. Physical and territorial barriers were shattered, giving rise to the gig economy, especially when the pandemic happened, opening more opportunities for online work.
Flexibility has been one of the major reasons why many young professionals, especially accountants, are drawn into freelance work arrangements. A freelance job is akin to a contractual job, wherein one does away from the usual employer-employee relationship and is expected to deliver the output as an independent contractor—free from direct control. But is it tax-free?
This question must be addressed two-pronged: on the obligation of the entity that contracts the workers (“freelance hirers”) and on the obligation of the freelance workers themselves.
Freelance Hirers
Commonly, non-resident foreign corporations not doing any business in the Philippines would hire Filipino freelance workers through freelance work sites. As to how this scenario will be subjected to tax here and whether it creates a permanent establishment, these remain to be dealt with by the government through legislation.
As aptly discussed by the Supreme Court (En Banc) in the consolidated cases of St. Wealth Ltd. et al. v. BIR et al., G.R. Nos. 25265/254102, quoting the Organization for Economic Cooperation and Development (OECD), the digital economy brought about the emergence of new business models that may "quickly cause existing businesses to become obsolete." From a tax perspective, the digital economy likewise poses several challenges because of the following key features:
To illustrate, the mobility of users in the digital economy allows them to: (1) carry on commercial activities remotely across borders; and (2) use virtual private networks (VPNs) or proxy servers that could mask the location of where the digital transaction occurs. Meanwhile, with respect to the mobility of business functions, the digital economy allows entities to coordinate activities across several territories in one central point while being geographically removed from both the location where the business operations are carried out and where the suppliers or customers are serviced.
Thus, as observed by the Court, the complexity of the digital economy could allow businesses to avoid a taxable presence or escape taxation anywhere by simply working around local laws and outdated conceptions of permanent establishments. To combat this, the OECD offers several proposals, such as revising treaty terms on Permanent Establishments, and implementing better domestic and foreign business rules among countries.
However, the Supreme Court admits that until such time as existing tax treaties and tax laws are revised and revisited to account for the digital economy, this Court must apply the laws as they currently are.
As a rule, a non-resident foreign corporation or even a resident foreign corporation doing business herein shall only be taxed on income earned within the Philippines. While digital transactions make it difficult to ascertain whether income was earned in the Philippines, this does not negate the fact that it may already be doing business in the Philippines under the Foreign Investments Act with its repeated entry into service contracts.
Freelance workers
As resident Filipino citizens, the tax obligations of these freelance workers or self-employed individual taxpayers are laid out in the Tax Code. The Tax Code makes it clear that for income derived from the sale of services, the focal point is where the actual performance of the service occurs. Moreso, as resident citizens, freelance workers shall be taxed on their income derived within and outside of the country.
Hence, the Bureau of Internal Revenue (BIR) expects the freelance workers to be registered as self-employed taxpayers at the very least. In this manner, freelance work is legitimized, thereby protecting consumers/freelance hirers. Under Revenue Memorandum Circular (RMC) 60-2020 dated June 10, 2020, the BIR reiterated the registration requirement under the Tax Code to ensure that all persons doing business and earning income in any manner or form, specifically those who are into digital transactions, are registered based on the provisions of Section 236 of the Tax Code and compliant with current tax laws.
Newly registered entities should comply with the provisions of the Tax Code and other applicable tax issuances, particularly on the following matters:
Note that BIR Form 2303 provides details of the freelance workers tax liabilities and the deadline for payment thereof. This could include the income tax (quarterly and annual filing), the percentage tax (if not subject to VAT), and the renewal of the annual registration tax.
Simply put, while the statute recognizes that the taxability of a foreign corporation's income is limited to that which is connected to Philippine territory or Philippine-sourced income, such is not the case for freelance workers who are resident citizens. As Filipinos, we are expected to pay our dues to the government.
As published in Mindanao Times, dated 23 July 2023
