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

Taxation of online credit-card transactionsTHE advent of information technology significantly changed the way we do business. Theemergence of virtual shopping malls, Web stores and other Internet-based outlets brought ahigh 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 thatcan 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 businesstransactions. This circular discusses in detail the withholding-tax and invoicing obligations andduties of the parties to the different online transactions.

What is peculiar about the RMC is the withholding-tax treatment on transactions consummatedthrough credit cards. The BIR considers credit-card companies as a conduit or a pass-throughentity, or an entity that became instrumental in the perfection of the sale between the buyer andseller. Based on the RMC, if the buyers payment is made through credit-card companies, theonline merchant or retailer is obliged to: a) issue electronically the BIR-registered invoice orofficial receipt for the full amount of the sale to the buyer; b) issue an acknowledgment receipt tothe credit-card company for the amount received; and c) pay the commission of the credit-cardcompany 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 theprice 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-throughentity 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, themerchant or service establishment (M/SE) allows the customer (i.e., cardholder) to make thepurchase on credit. The said receivables of the M/SE from the customer or cardholder are thenassigned by the former to the credit-card company at a discount for the early payment orsettlement of the transaction. What is being sold to and purchased by the credit-card companiesare the receivables from the purchaser or cardholder (BIR Ruling 456-11).

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

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

As such, the BIRs current rules on taxation of online transactions, where payments are coursedto 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 notsubject to withholding tax; however, because of the RMC, the difference between the face valueof the receivable and the amount paid to merchants or sellers shall now be considered ascommission 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 tiedup with banks. Hence, the increase in the amount placed on prepaid withholding tax and therising trend of online transactions among young professionals would certainly affect the cashpositions and liquidity of the credit-card companies over time.

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

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

The article is for general information only, and is neither intended nor should be construed as asubstitute for tax, legal or financial advice on any specific matter. Applicability of this article toany 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 atreynaldo.prudenciado@bdblaw.com.ph or call 403-2001, local 380.