Posted by Jose Calsas Jr.
Sep 24, 2024
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“Clearly, the thing that’s transforming is not the technology — it’s the technology that is transforming you.”
This remark by Jeanne W. Ross of the MIT Sloan’s Center for Information Systems Research resonates deeply with the ongoing digital transformation in the Philippines where technology is reshaping not only our government but also the people within it, turning them into digital citizens.
The Growing Digital Economy in the Philippines
My sister, a cum laude graduate and a diligent professional who was treasured by her employer, resigned from her corporate job of more than ten years. She was selling goods online while still employed. Another friend, a gifted auditor, who formerly worked with a big four audit firm, then applied to a multinational corporation as an accountant. She initially explored part-time online work with companies based abroad, doing bookkeeping, analysis, and assistant jobs.
Eventually, both my sister and friend decided to resign and concentrated on their online careers. Don’t get me wrong; working in a corporate set up is very likeable and has its own advantages. But these situations are becoming common in the country where corporate professionals transformed as digital citizens and have become part of our digital economy.
In fact, the Philippines Statistics Authority (PSA) reported in an article earlier this year that the local digital economy grew from Php 1.90 trillion in 2022 to Php 2.05 trillion in 2023 which was 7.7 percent growth year-on-year and contributed 8.4 percent to the country’s gross domestic product (GDP).
Understanding the Formalized Digital Economy and Ease of Doing Business
In the same article, the PSA defined digital economy as an area composed of digital transactions covering four major components:
1. Digital-enabling Infrastructure
The foundational technologies such as the internet, data centers, and cloud services that support digital communications and transactions.
2. E-commerce
The buying and selling of goods and services through online platforms, including payment transactions and digital marketplaces.
3. Digital Media/Content
Information, entertainment, and other content that is created, distributed, and consumed through digital platforms, such as social media, streaming services, and websites.
4. Government Digital Services
Online public services provided by the government through digital platforms, such as online applications for permits, tax filing, and other administrative services, to support the digital economy.
Of the four components, Digital-enabling infrastructure made up the bulk which can be further divided into Telecommunication services, Professional and business services, and Computer, electronic and optical products.
For individuals who are in the professional and business services sector, like my sister and friend, digital-enabling infrastructure is crucial, as it provides the tools necessary for them to work and transact online efficiently.
Creating a Formalized Digital Economy
The growth of the digital economy, particularly under Professional and business services, would naturally create an opportunity for the government to improve its digital infrastructure and capture this new phenomenon.
However, it must layout a favorable business environment so these online careers and traders would be encouraged to formalize.
The government must understand that the application of digitalization indicates the presence of formal registration. Individual and business entities that register with the government agencies like the Bureau of Internal Revenue (BIR) should pay taxes and transact legitimately. This way, in case of issues or disputes, they will have trust in our courts to resolve those disputes.
These are the same concepts advocated by the World Bank. Digitalization can empower but not replace a better business environment. In the recent report, the World Bank’s Director Dr. Norman Loayza said that digitalization cannot operate miracles in the absence of a favorable business environment.
These include presence of online business entry and one-stop-shop, an efficient and reliable online digital tax portal, and a functioning recourse to e-courts for dispute resolutions.
The Ease of Doing Business Act
One of the enabling laws for formalizing the digital economy in the Philippines is the Ease of Doing Business Act. Formally known as Ease of Doing Business and Efficient Government Service Delivery Act of 2018 (Republic Act 11032), this law sought to increase efficiency by reducing processing time, eliminating red tape, and curbing corrupt bureaucratic practices. It aimed to make an enterprise, individual or established entities, operate with ease while automating business registration processes.
As such, when my sister decided to let go of her previous career and started her online journey, she was able to apply, register, and renew her businesses with a one-stop shop mechanism within government agencies. There was a mandated standard turnaround times of 3 to 20 business days for various transactions based on the complexity of tasks. If the involved government office failed to process the application within the prescribed time frame, the law allows for automatic approval.
The Ease of Doing Business Act reduced the risk of graft and corruption, as all forms are being submitted online, and digital copies of documents will also be submitted electronically. The Citizen’s Charter governs the process, and written in English, Filipino or local vernacular, which must be displayed in a conspicuous area in each government offices.
It contains a checklist of all the requirements for each type of application or request, the procedure to obtain a particular service, the person responsible for each step, the maximum time needed to accomplish a request, the necessary documents to be presented, fees required, if needed, and the procedure for filing complaints.
Challenges Faced by Informal Business
Many businesses in the Philippines are not registered and are termed “informal” by the World Bank, meaning these businesses do not contribute to the formal economy. However, these informal businesses will be able to adapt to digitalization when we first address the reason why they were informal in the first place.
According to the same report by the World Bank above, informal businesses often operate outside of government oversight due to the high costs and complexity of registration and compliance. Digitalization presents an opportunity for the government to address these challenges by reducing the costs, making formalization more attractive, and improving the benefits of being a formal business.
To address this, the government should provide more information about the benefits and advantages of being registered. It should also consider reducing transaction costs for businesses, promoting transparent and fair competition, and facilitating enforcement of both formal and informal enterprises.
For government online platforms, some of the good improvements include a reliable website, up-to-date information, pro-active personnel, and payment gateways that don’t crash or do not show “cannot be reached” status when needed.
Practical Tips to Formalize and Register Online Businesses
As more Filipinos venture into the online space—whether as freelancers, virtual assistants, or online sellers—it’s essential to understand the steps to formalize your business and stay compliant with all applicable laws and regulations
Here are some practical tips to help you formalize and register your online business:
1. Choose the Right E-Commerce Platform
If you are selling goods or offering services, consider using established platforms such as Shopee, Lazada, or even TikTok. These platforms are registered with the BIR and can generate weekly, monthly, and annual reports for your business.
By using these platforms, you can streamline your bookkeeping and accounting processes, as this can also assist you in reporting sales and taxable profits to the BIR and in filing appropriate tax returns. While registering your business is distinct from conducting it, it is crucial to ensure that your business is prepared for any future audits by tax authorities.
For freelancers and service-based professionals, platforms like Upwork, Fiverr, and Onlinejobs.ph offer excellent opportunities to connect with different clients.
Read: How to Survive a BIR Tax Audit?
2. Use Relevant Accounting Tools
Platforms like Xero, an online accounting software for small businesses, or Juan Tax, a tax preparation tool, are useful for keeping track of your financials and necessary to automate tax preparation and facilitate electronic filing and payment.
However, it is important to note that that to be able to use either Xero, Quickbooks, or other accounting software as a CAS (Computerized Accounting System) in the Philippines, it must be registered with the BIR (Bureau of Internal Revenue).
3. Understand Your Tax Obligations
Freelancers, virtual assistants, and sole proprietors must file specific BIR forms depending on their income type.
Here’s a quick guide:
- BIR Form 1701: For self-employed individuals or sole proprietors.
- BIR Form 1701A: For virtual assistants, freelancers, self-employed professionals, independent contractors, and entrepreneurs, whose income is primarily from business or professional activities.
- BIR Form 1701Q: For quarterly income tax filing, applicable to all the above taxpayers.
- BIR Form 2551Q: For self-employed individuals who pay a percentage tax instead of VAT, filed quarterly.
- BIR Form 0605: Used for penalties or specific BIR fees.
Filing these forms can be complex and overwhelming. To ensure compliance, it’s best to consult a professional accountant to determine which forms you need to file.
Opportunities for Online Entrepreneurs under New Regulations
On December 21, 2023, the Bureau of Internal Revenue (BIR) issued Revenue Regulation (RR) 16-2023, which introduced a 1% withholding tax on gross remittances made by electronic marketplace (e-marketplace) operators and digital financial service providers (DFSP) to sellers/merchants of goods and services sold/paid through the former’s platform/facility. This regulation, clarified by Revenue Memorandum Circular No. 8-2024, mandates that online sellers must ensure their business registration through the BIR’s e-services portal.
Likewise, virtual assistants and professionals with existing Tax Identification Numbers (TINs) must continue to file their income taxes quarterly and annually to be compliant with their tax obligations.
Additionally, on January 5, 2024, President Ferdinand “Bongbong” R. Marcos Jr., signed into law the Ease of Paying Taxes Act or the EOPT Act (Republic Act 11976), which took effect on January 22, 2024. This introduced several provisions that make tax compliance easier for small businesses and freelancers. The removal of the Php 500.00 annual registration fee and the classification of taxpayers into micro, small, medium, and large have significantly simplified tax filing procedures.
On top of that, online sellers and service professionals are subject to income tax on earnings exceeding Php 250,000, as per the TRAIN Law, also known as Tax Reform for Acceleration and Inclusion (TRAIN) Law (Republic Act 10963). These regulations present an opportunity for taxpayers to plan and strategize by adhering to regulations as early as possible when they establish an online business or start their careers online.
The Bottom Line
As Benjamin Franklin famously said, "In this world, nothing can be said to be certain, except death and taxes." As more professionals shift to online careers and businesses, it’s important to recognize the responsibilities that come with these opportunities. Formalizing your business, staying compliant with tax regulations, and using the right digital tools will not only supports the local economy but also establishes a legitimate source of income, which is beneficial when applying for loans and making investments.
Remember, digital registration and automated transactions are the future of business. Do not fear that registration will expose you to the government or that paying taxes is an additional burden. Online sellers are subject to income tax on their taxable income. Business registration and participation in the formal economy help the government enhance its revenue collection efforts and encourage greater business activity. This regulation ensures that suppliers and providers engage only with legitimate business ventures.
Jose Calsas Jr. is a lawyer and a Certified Public Accountant. He is currently the Chief Financial Officer (CFO) and Head of Legal & Compliance of D&V Philippines, a business process outsourcing company specializing in finance and accounting solutions. Connect with him on Linkedin.
This article has been written in collaboration with Angelica Garcia, a content specialist at D&V Philippines.
