BDB Laws Tax Law for Business appears in the opinion section of Business Mirror every Thursday.

Taxation of online credit-card transactions

THE advent of information technology significantly changed the way we do business. The
emergence of virtual shopping malls, Web stores and other Internet-based outlets brought a
high level of convenience to a number of consumers. These consumers can now enjoy hassle-
free shopping through the use of their cellular phones, tablets, laptops and other gadgets that
can access the Internet.

Just recently, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular
(RMC) 55-2013, which deals with the tax obligations of the parties in online business
transactions. This circular discusses in detail the withholding-tax and invoicing obligations and
duties of the parties to the different online transactions.

What is peculiar about the RMC is the withholding-tax treatment on transactions consummated
through credit cards. The BIR considers credit-card companies as a conduit or a pass-through
entity, or an entity that became instrumental in the perfection of the sale between the buyer and
seller. Based on the RMC, if the buyers payment is made through credit-card companies, the
online merchant or retailer is obliged to: a) issue electronically the BIR-registered invoice or
official receipt for the full amount of the sale to the buyer; b) issue an acknowledgment receipt to
the credit-card company for the amount received; and c) pay the commission of the credit-card
company net of 10-percent expanded withholding tax (EWT).

On the other hand, credit-card companies are obliged to: a) remit to the merchant or seller the
price less EWT of one-half of 1 percent; b) remit to the BIR the EWT of one-half of 1 percent;
and c) receive the agreed commission from merchant, net of EWT of 10 percent.

The flow of transaction as shown above, treating the credit-card company as a pass-through
entity between the buyer and seller, may be contrary to the true nature of the business of credit
cards. Under one ruling, the BIR held that, in case of purchases made with a credit card, the
merchant or service establishment (M/SE) allows the customer (i.e., cardholder) to make the
purchase on credit. The said receivables of the M/SE from the customer or cardholder are then
assigned by the former to the credit-card company at a discount for the early payment or
settlement of the transaction. What is being sold to and purchased by the credit-card companies
are the receivables from the purchaser or cardholder (BIR Ruling 456-11).

Hence, the transaction between the credit-card company and the merchants or sellers should
be characterized as discounting or sale of receivables and not as a contract of agency for
facilitating the perfection of the sale or the collection of the receivables. The income earned by
the credit-card company in the transaction should be treated as a gain on discounting and not
as commission.

The difference between the two treatments is that the income derived from the sale and
purchase of receivables, being the yield or monetary benefit derived by the credit-card
companies on their traditional lendings, is not subject to final or creditable withholding tax. As
explained in RMC 39-85, traditional finance-company activities, such as extending credit
facilities to consumers and to industrial, commercial or agricultural enterprises by buying and
selling of accounts receivables and other evidence of indebtedness, are not subject to
withholding tax (BIR Ruling [DA-(C-10) 058-08]), whereas the commission earned for facilitating
the transaction is subject to 10-percent EWT.

As such, the BIRs current rules on taxation of online transactions, where payments are coursed
to credit cards, would result in the increase in prepaid withholding taxes on the part of the credit-
card companies. As discussed above, if its a simple sale of receivable, the discount is not
subject to withholding tax; however, because of the RMC, the difference between the face value
of the receivable and the amount paid to merchants or sellers shall now be considered as
commission subject to 10-percent EWT, and not as discount.

It is a fact that the credit-card business is cash-intensive; thats why this business is usually tied
up with banks. Hence, the increase in the amount placed on prepaid withholding tax and the
rising trend of online transactions among young professionals would certainly affect the cash
positions and liquidity of the credit-card companies over time.

Since the RMC is specifically issued to clarify the taxation on online transactions, there is a
basis that the 10-percent EWT on income earned by credit-card companies is not applicable to
over-the-counter credit-card transactions. Such can be confirmed, however, if the BIR issues
further clarification on this matter.

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The author is a senior tax specialist of Du-Baladad and Associates Law Offices (BDB Law), a
member- firm of World Tax Services Alliance.

The article is for general information only, and is neither intended nor should be construed as a
substitute for tax, legal or financial advice on any specific matter. Applicability of this article to
any actual or particular tax or legal issue should be supported by professional study or advice.
For comments or questions concerning the article, e-mail the author at
reynaldo.prudenciado@bdblaw.com.ph or call 403-2001, local 380.