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Critique:
1. The proposal is to amend the NIRC and the Local
Government Code to implement the business privilege
tax to reach the e-business entrepreneurs but it is not
clear what will be amended and what will the
amendment entail (i.e., NIRC: Income tax will not be
applied to e-Business entrepreneurs, instead, they will be
taxed on the business privilege tax, or the Business tax
by the local government)
2. In any case, if the proposal is in effect an exemption or
an additional tax, there has to be a discussion on how to
hurdle the constitutionality (if exemption, whether there
is substantial distinction and the government would like
to promote the industry in lieu of the taxes foregone. If
additional tax, whether there is a substantial distinction
to single out e-Business entrepreneur, may be violative
of equal protection clause and uniformity of taxation)
3. Given the “invisibility” of the e-Business entrepreneurs,
how can you ensure that they will comply with the
registration? The purpose and significance of the
proposal will be defeated if there will be no provision on
how to strictly enforce the proposal.
4. Evaluate the existing laws and power of both the BIR
and respective Local Governments to reach e-Business
enterepreneurs (i.e, withholding tax system)
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Show Me The Money: Enacting a Law Providing for A
Business Privilege Tax on The Underground Electronic
Microbusiness Economy
A THESIS
PRESENTED TO THE
ATENEO DE MANILA UNIVERSITY
SCHOOL OF LAW
IN PARTIAL FUILFILLMENT
OF THE REQUIREMENTS OF THE DEGREE OF
JURIS DOCTOR
PRESENTED TO
ATTY. ARRIOLA
THESIS ADVISER
DEAN GRUBA
JOSEPH R. PLAZO
3D
SY 2010-2011
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Joseph R. Plazo
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Show Me The Money: Enacting a Law Providing for A Business Privilege Tax on The
Underground Electronic Microbusiness Economy.
Thesis Statement:
Conventional business taxation do not contemplate the underground ebusiness economy and fail to regulate nor raise revenue from the same; it is
THEREFORE imperative to implement a law providing for an attractively
incentivized, business privilege tax system which enhances both collection
and reportorial.
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Abstract
Hiroshima wowed the world in 1945 being the largest man-made explosion ever
witnessed. Few could ever forget the fireball that overwhelmed even the sun.
Beginning 2001, a new explosion rocked the planet, with a size and magnitude far
dwarfing that of Hiroshima. This is the E-commerce explosion- and it just keeps growing.
E-commerce involves the buying and selling of products and services over electronic
systems. It is a totally new business model far overshadowing the scope of traditional
brick and mortar industries. The amount of trade conducted electronically detonated
since the expansion of the Internet. Today much of commerce consummates over the
ether, including transactions like electronic funds transfer, enterprise chain management,
online marketing, business process outsourcing, electronic data interchange, automated
inventory management systems, and instantaneous data collection systems. 1
Beginning 1996 traditional traders and self-employed service providers followed
gargantuan software houses into the new economy where you can acquire practically
anything through the global web: from a love note to a towering yacht. The only
exception seems to be a trip to Saturn. But that may soon change.
Commentators liken the E-commerce system to a nation of perfect democracy. The laws
of supply and demand apply to perfection with the tenets of capitalism pervading
everything.: if you sell ’ you win, if you don’t sell ’ you loose. It’s all about marketing2
The Global Wireless Market-Benchmarking Europe and Asia” available at
http://emarketer.com/analysis/wireless (last accessed July 30.2010)
1
2
Id
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According to eMarketer’s annual report in 2006 the global E-Commerce market size has
grown to $133 billion. Industry insiders predict a rapid rate of growth of at least 25% and
that by 2010 the amount should hit $407 billion. The figure had been vastly
underestimated. In 2009 The Global Digital Economy report pegged the actual value at
close to 1Trillion and specifically cited the Philippines and India driving the growth of
micropayments and micro-credits. 3Filipinos display a penchant for online buying and
selling!
Many internet-savvy Filipinos savor massive slices from the global e-commerce pie.
As DSL and wireless internet spiral to economical levels, more Filipinos take their
business to the web. A growing army work in pajamas, in their bedrooms or backyards.
They sell everything from handicrafts from Vigan to incisive ten page financial reports.
The money is good. The citizens benefit. But the government remains in the dark.
The problem is that online transactions are next to impossible to moderate. A citizen can
sell native seeds to a German in the Ukraine and get paid in postal money order.
Multiply.com in afficionados in IloIlo promote textile goods to Japanese. Unless spies
abound, the government cannot benefit from this contract. Indeed, the NIRC goads all
upstanding citizens to report such underground income, but this is realistically
improbable. The framework governing small-scale paperless commercial transactions is
hobbled by an outdated business taxation system under the local government code which
contemplates a fixed location of business for reportorial and payment purposes.4 In
3
Asia-Pacific B2C E-Commerce: China, Japan and South Korea available at
http://www.emarketer.com (last accessed Aug 10, 11:45pm)
L
Local Government Code, Republic Act 7160, Book 2Title 1, Chapter 1, Sec 143- 145
(1991). Most relevant section is SEC. 146. which provides for Payment of Business
Taxes. - (a) The taxes imposed under Section 143 shall be payable for every separate or
distinct establishment or place where business subject to the tax is conducted and one line
of business does not become exempt by being conducted with some other business for
which such tax has been paid. The tax on a business must be paid by the person
conducting the same.
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order to be taxed properly, one must operate from a pre-determined location. This not the
case for internet entrepreneurs. Hence, web businessmen deftly operate outside Philippine
taxation and monitoring structures.
In sum: the realm of e-commerce business transcends physical establishments.
Participants consummate economic transactions in transitu. Since a fixed business
address is totally unnecessary for e-commerce players. there is simply no incentive for
the its participants to register for business permits and licenses, nor for the populace to
pay taxes.
The government addressed part of the underground economy problem by
introducing the Baranggay Microbusiness Act which encourages registration of
baranggay-based manufacturing businesses to register in exchange for freedom from
income taxes. The objective was noble: to foster entrepreneurship and encourage
reportorial of earnings. Unfortunately the requirements and scope were so narrow that
few actually availed of it. According to newspaper commentators, the Act, for all intents
and purposes is a dead law.
Today, the internet continues to grow, and Filipinos by the tens of thousands
continue to jump into the ebusiness entrepreneurship. According to AC Nielsen,
Paypal.com, Philippine transactions have breached $100Million over the past quarters ,
with twenty million Filipinos connected and online.5
Our government is at a crossroad. If it seeks a slice of that lucrative pie, if it
desires to nurture the budding e-entrepreneurship, and if it endeavors to rationalize
electronic microbusinesses, THEN it must act today with a workable law that motivates
registration and invites diligent reportorial.
5
Yahoo and Nielsen First Ever Internet Habits, available at
http://aboutmyrecovery.com/2009/03/26/yahoo-nielsen-first-ever-internet-habits-studyfor-the-philippines/ (last accessed Sept 30, 2010)
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Abstract ............................................................................................................................... 4
CHAPTER I: Bird’s Eye View of The E-Commerce Empire ............................................ 8
The Evolving Internet Arena .......................................................................................... 8
Vexing Issues: Statement of the Problem ..................................................................... 10
Objectives of the Study ................................................................................................. 13
Significance of the Study .............................................................................................. 13
Scope, Methodology and Limitations .......................................................................... 15
Definition of Terms....................................................................................................... 16
DISCUSSION ................................................................................................................... 19
CHAPTER II: E-Commerce Transactions: Nature and Methods ..................................... 19
Brick and Mortar Vs. PurePlay Systems: The Clash of Giants .................................... 19
The Philippine E-business Economy Expands Exponentially ...................................... 24
Paypal Storms The Philippines ................................................................................. 24
Regulatory Framework Continues To Float in Limbo .............................................. 24
Bibliography ..................................................................................................................... 30
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CHAPTER I: Bird’s Eye View of The E-Commerce Empire
The Evolving Internet Arena
Man had been on earth for only fifteen thousand years, yet his greatest economic
and scientific advancements began only in the past five hundred years. Bring a man born
merely two hundred years past to today and he will marvel at what his kin had done with
the planet. The changes are mind boggling.
The Industrial Revolution of the 1700s kickstarted the socio-political evolution.
The frenzied period shrunk the world and brought nations in a passion of collaborative
effort, ushering an unprecedented growth in the fields of agriculture, medicine, scientific
research and capitalist expansion6 The evaporation of cross-nation barriers nurtured
laissez faire, goaded capitalism and ultimately created economic empires that brought
prosperity to governments and a higher quality of living to its citizens. Most thought the
pinnacle of progress had been reached. Then the internet revolution of the 90s began.
The internet first started as ARPANET. The US Governement mandated the
ARPANET to maintain critical communications amongst local government units in case
of a nuclear strike. It existed through interconnects between mainframes based in
universities and government offices. The ARPANET, however, evolved. Mainstream
society turned to the interconnection of computers for information and commerce. The
ARPANET grew as more computers and networks linked up, providing nodes in every
corner of the globe.
Today, the internet serves not just a vehicle for information and communication,
but also a powerful force for commerce. The e-business economy continues to boom,
especially in developing nations. Industry analysts predict the total monetary worth of all
6
Joseph A. Montagna, The Industrial Revolution available at
http://www.yale.edu/ynhti/curriculum/units/1981/2/81.02.06.x.html (last accessed Oct 3
2010).
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e-business transactions to exceed 1 Trillion this year of 2010. Asians now account for
42% of global internet usage7 and Filipinos have begun to explore with vigor the power
of making a livelihood online. Leading global payments gateway, Paypal Inc, recognized
the lucrative online revenues Filipinos continue to bring, that the Fortune 500 company
opened a local service for Filipinos in tandem with leading remittance agencies. This,
after almost ten years of snubbing the Filipinos.
It used to be that Filipinos made a living entering into employment or selling
products and services in brick and mortar establishments. A brick and mortar
establishment is a business run out of a fixed location within the confines of delineated
real estate. Shopping centers, law offices, interior design firms are examples of brick and
mortar businesses. 8 The flip side of the coin looks at pure play endeavors which are run
entirely online with little or absolutely no need for fixed locations. Amazon.com is an
example of a quasi-pure play business. It maintains no retail outlets, but this Five Billion
a year company generates sales solely through its parent website and affiliates. 9
Large corporations are not the sole economic beneficiaries of burgeoning internet
structures. The little guy easily leverages the power of the internet to create livelihood.
Whether a work-at-home mom or a retired OFW, almost anyone can be an overnight
company with a flashy online storefront. It is for this reason, that economists herald the
Internet as the great equalizer. 10 Today, multiple streams of revenues are available to
Filipinos through sites like ebay, auction.com, yahoo, amazon.com, multiply.com, social
networking sites and self-hosted sites. The money’s good, the flows are steady- and
government has almost no means of taking a cut.
7
Global Digtal Economy Report available at
(http://www.budde.com.au/Research/Global-Digital-Economy-E-Commerce-MCommerce-Trends-Statistics.html?r=51 (last accessed Aug 1, 2010, 9am)
8
Efraim Turban, Electronic Commerce 56-110 (January 2002)
9
Id
M. Phillips, “Making Money Out of Thin Air”, Business Online 75 (November 2000)
10
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Vexing Issues: Statement of the Problem
Employment is at an all time high, with poverty eradication one of the primary
objectives of the current Aquino Administration. According to the 2010 State of the
Nation Address, more than eighty percent of the population live below the poverty line.
Such poverty continues to hold back what could be a vibrant dragon economy, according
to the President. 11The problem continues to grow worse that a local executive quipped in
exasperation that the quickest possible fix to the poverty problem is to merely drop the
poverty threshold by 20% of the current minimal income rate. One cannot help but
remember the stark resemblance to the controversial mandate of the Former President
Gloria Macapagal Arroyo: fix the room shortage problem of Public High Schools by
increasing the ratio from eighty students to one room to two hundred students to one
room. Et Voila: an overnight solution to a perennial problem.
Notwithstanding the lack of jobs and conventional employment, Filipinos
continue to be resourceful. Today, internet cafes abound and DSL plans continue to drop
to commodity levels. The low cost provides easy access to the world wide web and
affords Filipinos an avenue to livelihood beyond conventional employment. For the
average Filipino, there are numerous ways to generate a means of earning online. Some
of the following include:
Blogging: A blogger writes opinions, reviews or mini-dissertations on subjects
appealing to him. The typical blogger spends next to nothing to blog. He opens a free
account on a global blog platform such as blogger and wordpress. He can choose to write
anytime he pleases, wherever he pleases. He can compose from the comfort of his
bedroom, on vacation at a wi-fi enabled beach or at the lounge of a preferred coffee shop.
Compensation, should he opt for it, comes in the form of advertising revenue. The most
popular is via Google Adsense. Through the adsense program, Google Corporation places
ads on blogs and pay the blogger per click on the ad. According to Google Reports, the
11
President Aquino, 2010 State of the Nation Address
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average tech blogger stands to make US$300 to US$1200 per month.12 Yugatech, a local
tech blog run by a Filipino from his laptop, claims making over US$1000 a month on
average.13
Virtual Services. Freelancers love free time and they love working at their own
schedules. Free services such as Elance.com and Vworker.com help match free lancers
with available work. When Filipinos sign up at Elance.com, they browse at their leisure
,over a thousand project-based jobs that are conducted entirely over the internet. Jobs
often involve web development, coding, image manipulation or even transcription.
Payout depends on the difficulty of the work and can range from as low as $80 for a few
pages worth of transcription or $80,000 for web development. The finished product is
transmitted via email and payment entirely through wire transfer or escrow.
Product Sales. Almost everyone has already heard of Multiply, Facebook, Ebay
and Auction.com These global giants bring the Filipino to the forefront of virtual tiangges
where products can be sold entirely online on a 24/7 basis without the need of a physical
store- or a business permit. Multiply.com is a favored sales vehicle for Filipinos.
Everything from handicrafts to knock off Lacoste are sold on Multiply and subsequently
shipped by the vendor. Often, face to face contact never occurs, with the transaction
being consummated after a cheque is mailed or a deposit executed. As of 2009, Multiply
estimates the value of Filipino transactions at its site to over One Hundred Million US
Dollars14
The Filipino knows how to survive. Now that traditional sources of livelihood has
dried up, he turns to alternative modes of survival. His resilience and flexibility is
admirable, but there’s a flipside to the brightside. While Filipinos can easily generate a
business or service online, most of it pertains to the underground economy. The
12
Google Sign Up Statistics, available at Google.com (last accessed at Oct 2010).
“How Much I Made This August”, Yugatech.com available at
http://www.yugatech.com/2009/How-much-I-made-this-august.php (last accessed on July
2010)
14
The E-commerce Market: Size and Trends, available at http://www.gspay.com/the-ecommerce-market.php (last accessed Aug 20,2010. 12:30pm)
13
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government, despite NIRC mandates, is largely powerless to tax nor monitor the vast
majority of online earnings as regular income. It cannot tax what it cannot see.
Furthermore, the standard standard business taxation system generally
contemplates operations from a fixed physical location and fails to adequately regulate
e-business transactions which occur at transient and varying locations. Exemplifying,
government registration for an entrepreneurial endeavor requires a DTI name, SEC
registration, Mayor’s Permit and BIR registration. All these envision a fixed base of
operation- and official receipts for the place of business.15
The location requirement presents quite a quandary not just here, but also in the
United States. The perennial questions abound: Should taxes be imposed where the
company has a physical presence? Where the sale is consummated? Or where the
physical product is shipped from? 16 There is no clear cut answer. However, in the recent
Quill v North Dakota, the US Supreme Court ruled that a company may leverage sales
taxes to buyers only where it has a physical presence. Making sales to customers outside
the state of its operation does not mandate the payment of sales tax. This came to be
known as the Bright-Line test whereby a line must connect a company’s permanent place
of operations to the State which expects sales taxes to be leveraged17 Sales tax,
unfortunately, is just one facet of regulation. Other taxation questions obviously remain.
In some US jurisdictions lawmakers acknowledged that existing tax laws have not
evolved with virtual worlds- and ephemeral transactions in mind. For instance, some
federal taxing authorities maintain that transactions consummated over the web may not
be taxed nor monitored unless physical advertisements are made regarding the sale. If the
sale is unaccompanied with, say, a news paper advertisment, it fall out of the ambit of
federal tax law. As of 2010 the IRS has proposed that Congress consider enacting
15
Local Government Code [RA 7160] Book 2, Title 1, Chapter 1, Sec 146 which states
(a) The taxes imposed under Section 143 shall be payable for every separate or distinct
establishment or place where business subject to the tax is conducted.
16
Mom & Pop V Dot.Com: A Disparity in Taxation Based on How You Shop? 2002
Duke L. & Tech. Rev. 0028
17
Quill V. North Dakota 504 U.S. 298 at 313.
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legislation providing that Internet auction sites fall within the definition of “broker” for
information reporting purposes. The move hopes to plug the monitoring gap. 18
Just as US taxation and monitoring systems failed to evolve with e-commerce
transactions, so it is with the Philippines. In fact, the situation is far worse. Small scale
e-business enterprises in the Philippines falls neatly out of the scope of current
business taxation regulations. Since transactions can be done entirely online,
consummated at transient locations, and entered into by parties across national borders,
the government finds itself in a quandary of regulating and taxing the activity. Simply
put, the act of engaging in e-business does not necessitate fixed bases of operationthereby putting the activity in a gray area out of reach of the law.19
Objectives of the Study
The paper looks at the burgeoning growth of Filipino entrepreneurship through
the online evenue, analyzes it within the context of an underground economy, and
provides a legal solution that may reposition it within mainstream accountability- where
the government can monitor, cash-in, and if possible, regulate the activity. The author
aims to proffer a viable law which not only allows the government to tap into the vast
underground economy, but also empower the brave Filipinos foraying into such
uncharted territory.
Significance of the Study
The Government perpetually finds itself in a collection shortfall. BIR consistently
falters at meeting revenue targets and the failure direly impacts the economy. Today it’s
failings are readily apparent in the underground economy which is allegedly beyond 40%
Leandra Lederman, EBay’s Second Life: When Should Virtual Earnings Bear Real
Taxes?, 118 Yale L.J. Pocket Part 136 (2009),
http://thepocketpart.org/2008/01/26/lederman.html.
19
A conversation with incumbent Assistant Secretary Pelayo of the DTI confirms that the
legal framework regulating online businesses in virtually none existent.
18
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of the total monetary value of GDP. In a WorldBank Study, the Philippines has 43% of
its economy in the informal sector, and this is projected to grow all the more.20 Sadly,
government is ill-equipped to tackle many endeavors that take place over the internet.
The situation is not confined to e-business. Internet transactions generally escape
the arms of conventional law. On October 17, 2010, the Comelec Chairman admitted that
the government was powerless to regulate online campaigning because RA 2009
provides no framework nor guideline of oversight over virtual promotions.21 In a related
note, the US President Barack Obama admitted that much of his support came from
Facebook campaigning. Imagine the ramifications for local candidates seeking to launch
early campaigns- legally!
Intellectual property rights are but another facet that stirs up the mud for those
involved in web-related activity. As grimaced by Gamespot Editor Laura Parker,
authorities are unsure about a lot of things: how much “copying” of data constitutes a
crime, what should be the limits of DRM and how can accountability be enforced. 22
Notwithstanding the dizzying array of potential web-related controversies, the
paper’s primary concern is the e-business world of the underground economy engaged
in by Filipinos. As with RA 2009s utter failure to account for facebook campaigning, the
National Internal Revenue Code and the implementing rules of the Local Government
Code fail to account for virtual transactions that take place from transient and virtual
locations. This paper has one goal. It seeks to establish much needed legal measures that
will encourage underground entrepreneurs to register, thereby making their businesses
visible and open to a “compromise taxation system”
20
Friedrich Shneider, Size and Measurement of the Underground Economy in 110
Countries Around The World, a World Bank report available at
http://rru.worldbank.org/Documents/PapersLinks/informal_economy.pdf (last accessed
Oct 10,2010)
21
Comelec Powerless to Regulate Facebook Campaigning, Philippine Star, (October 17,
2010)
22
Laura Parker, The DRM Dilemma, available at
http://www.gamespot.com/features/6209660/index.html (last accessed Nov 2, 2010)
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Scope, Methodology and Limitations
The Philippine underground economy is vast. It covers everything from sari-sari
stores making a subsistence living to Ebay traders marketing handicrafts or comic books
via Multiply.
This study begins with a look at business endeavors engaged in by individuals or
aggregations of unincorporated individuals utilizing the internet as a means of livelihood,
or augmentation of their day jobs. Activities that do not include the use of the internet as
a vehicle of revenues are excluded. From this juncture, the study analyses the gross
inadequacy of current taxation measures and its failure to regulate the underground online
economy.
The study then proceeds to analyze select foreign taxation models such as the
Delaware Corporation Code and the Seychilles Offshore Incorporation statutes which
does away with percentage tax and imposes flat yearly fees to encourage registration of
businesses within their jurisdiction.
Finally, the paper establishes the viability of a new Law imposing a business
privilege tax derived in part from the aforementioned foreign taxation systems. The law
will cover only individuals involved in the online underground economy, generating less
than One Million Five Hundred Thousand (PhP1,500,000.00) per year and espouse three
objectives:
1) Encourage registration of the business activity as an individual
2) Levy yearly business privilege tax on such activity, to the exclusion of all other
taxes.
3) Provide financial and technical incentive to registrants as a means to encourage
voluntary participation in the program.
The purpose of the law is straightforward: to encourage the registration of
underground e-business activity in order that it may be monitored and regulated.
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Definition of Terms
Data message includes information created, sent, received or stored by electronic,
magnetic or similar means including, electronic data interchange (EDI), electronic mail
and analogous means;23
Electronic data interchange (EDI) includes the electronic transfer from PC to PC of
data using an agreed standard to structure the information. The internet is the most
popular form of EDI;24
Originator of a data parcel pertains to a person by whom, or on whose behalf, the data
message purports to have been sent or generated prior to storage, if any, but it does not
include a person acting as an intermediary with respect to that data message;
25
Addressee of a data parcel includes a recepient who is intended by the originator to
receive the data message, but does not include a person acting as an intermediary with
respect to that data message;26
Intermediary with respect to a particular data message, means a person who, on behalf
of another person, sends, receives or stores that data message or provides other services
with respect to that data message;27
Information system means a system for generating, sending, receiving, storing or
otherwise processing data messages.28
23
UNCITRAL Model Law on Ecommerce. Chp. 1, Art 2.
Id.
25
Id.
26
Id.
27
Id.
28
Id.
24
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Payment gateway Pertains to financial services companies which collect funds through
credit cards, stored value accounts, check and analogous means to be later remitted to the
recipient. Gateways include companies like Paypal.com, Digital River, and Mastercard
Blog Platform includes free and paid online blogging services open to the public which
allows content creation.
Social Networking Sites include online services that allow the interaction of its members
on a social, business or economic level. Social Networking sites include Facebook,
Friendster, Myspace and Multiply.
Commercial Activities shall be given a wide interpretation so as to cover matters arising
from all relationships of a commercial nature, whether contractual or no. 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, sales and
more.29 For the purposes of this Paper, the Author includes only commercial activities
conducted over the internet with a view for regularity and not cumulatively exceeding
One Million Five Hundred Pesos Gross Revenue per year.
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, video, symbols or any one
of these functions30
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),
29
Implementing Rules and Regulations of the E-Commerce Act (Republic Act No.
8792), Part II, Chapter 1, Sec (b).
30
Id. Part II, Chapter 1, Sec ©.
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electronic mail, telegram, telex or telecopy. Throughout these Rules, the term “electronic
data message” shall be equivalent to and be used interchangeably with “electronic
document.”31
Information and Communications System refers to a system for generating, sending,
receiving, storing or otherwise processing electronic data messages or electronic
documents and includes the computer system or other similar device by or in which data
is recorded or stored and any procedures related to the recording or storage of electronic
data message or electronic document. 32
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 the 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.33
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 and affirmed, which is received, recorded, transmitted, stored, processed,
retrieved or produced electronically. Throughout these Rules, the term “electronic
document” shall be equivalent to and be used interchangeably with “electronic data
message.”34
31
Id. Part II, Chapter 1, Sec E.
Id. Part II, Chapter 1, Sec F.
33
Id. Part II, Chapter 1, Sec G.
34
Id. Part II, Chapter 1, Sec H.
32
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Electronic key refers to a secret code, which secures and defends sensitive information
that crosses over public channels into a form decipherable only by itself or with a
matching electronic key. This term shall include, but not be limited to, keys produced by
single key cryptosystems, public key cryptosystems or any other similar method or
process, which may hereafter, be developed.35
DISCUSSION
CHAPTER II: E-Commerce Transactions: Nature and
Methods
Brick and Mortar Vs. PurePlay Systems: The Clash of Giants
Commerce traditionally involved face to face transactions. The merchant and the
buyer, meet , negotiate terms, and upon the meeting of the minds, perfect a consensual
contract 36. It is at this point that legal obligations for the transfer of value occur.
Prior to the explosion of the Internet as a medium of commerce, transactions for
value took place in the physical world. Buyers and sellers converged upon a physical
location that may have been an office, retail outlet or market place. A building was
therefore necessary. Hence the monicker “brick and mortar” industry came to describe
conventional businesses that thrived in the real world 37
Business Permits and Licenses
Carrying on business transactions within the brick and mortar arena greatly
simplified regulatory functions of the government. Since businesses operated out of fixed
locations, the government could monitor, track and tax the participating entities. The
35
Id. Part II, Chapter 1, Sec I.
Philippine Civil Code, Art 1305.
37
C. Steinfield, T. Adelaar, Y.-J. Lai, "Integrating Brick and Mortar Locations with Ecommerce: Understanding Synergy Opportunities," hicss, vol. 8, pp.216b, 35th Annual
Hawaii International Conference on System Sciences (HICSS'02)-Volume 8, 2002
36
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simple tools of tax registration and tax mapping allowed officials to regulate all
activities under its watch. In the Phillipines ,the Local Government Code, Sec 146
mandates the registration and payment of business taxes to wit:
SEC. 146. Payment of Business Taxes. - (a) The taxes imposed under Section 143
shall be payable for every separate or distinct establishment or place where
business subject to the tax is conducted and one line of business does not become
exempt by being conducted with some other business for which such tax has been
paid. The tax on a business must be paid by the person conducting the same.
The Local Government Code clearly mandates the requirement for business permits
and licenses for every distinct physical business establishment, whether primary, project
site, manufacturing compound or sales office. Specifically, in order to legally operate
within the Philippines, the following documents are required:

An SEC or DTI Certificate

A Mayor’s Permit

Locational Clearance

Bureau of Fire Protection Clearance

DOLE / TESDA/ DOH Clearance where pertinent

Baranggay Permit
All the aforementioned permits require a specific address and, where pertinent, a
description of the total floor area, location plan and sitemap. The lack of descriptive
information may lead to the non-issue of the permit. This is particularly true since certain
fees or licenses are assessed on the size of the office space.38 All factors being even,
certain Cities or Municipalities levy higher Mayor Permit fees on enterprises operating
out of larger physical plants.
It is resoundingly clear that the conventional registration system allows government
to keep watch on the commercial activities of its citizens. The licenses and permits
required by local government units aim for twin goals. Regulation is the primary purpose;
whereas taxation the secondary function. The question arises: what of regular transactions
38
Business Licensing of the Department of Trade and Industry available at
http://dtincr.ph/service_licence_permits.php (lasst accessed on Mar 24,2011)
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occurring without registered business establishments? How will such be tracked,
regulated and monitored? More importantly, how can the government trace potential tax
bases trending towards profitability – and future government revenues.
The Internet Boom: Changing The Game In The Philippines
From 1995 onwards, the Internet took root in the Philippines. Many speculate
that information research is one reason for its overnight popularity. Libraries and
bookstores witnessed fewer visitors with the prevalence of online research. Convenience
and access to information twenty four hours a day transformed the World Wide Web into
an overnight sensation.39
In the year 2000, the informal e-business economy in the country exploded.
Citizens engaged in the trade of goods and services with the aid of various online
services. Transacting business solely through electronic means came to be known as Pure
Play Business Model. The sales of products and services through electronic means
leveled many barriers to entry that plagued new entrants in the traditional Brick and
Mortar. And immediate benefit was instant access to a global market with little to no
marketing cost and a truly lean organizational structure.40 For this reason, online selling
generated almost overnight favor in the country.
The array of options allowing suppliers to each buyers online is mind-boggling.
First, physical products sourced in the Philippines were sold through auction sites
such as eBay or social networking organizations such as Multiply, Friendster and
Facebook. Payment protocols included postal money order and check, but these fell out
of favor for security issues. Postal pilferage was prevalent and checks often disappeared
enroute. Vendors then began requiring instant payment through wire transfer or stored
39
A.B. Credaro, "Now we've got the Internet, why do we still need libraries?" 2001-2002
available at http://www.warriorlibrarian.com/RESEARCH/libresearch.html
40
Bricks and Clicks: Distinguishing the Pure Play Ecommerce Model , available at
http://www.highbeam.com/doc/1G2-3405000016.html (last accessed Feb 2, 2011,
2:30pm)
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value transactions such as credit card or paypal41. The latter allowed buyers and sellers to
match purchases with corresponding tracking numbers and charge slips.
Second, software products and intangible property were promoted via
Compuserve, Clickbank and Digital River through pay later schemes such as shareware.
Shareware was an efficient method of product delivery whereby the publisher merely
uploaded a masterfile that was promoted by a network to its subscribers. Those who liked
the product paid later through credit card or stored value systems such as paypal. 42
Paypal accelerated the flow of value. Through the service, buyers and sellers perfected
contracts without physical interaction. The buyer merely identified desired commodities,
authorized paypal to transfer credits, and waited for the seller to fulfill his end of
delivery. In case of dispute paypal reversed the transaction of funds held in virtual
escrow. Safety and security attended every commercial interaction.
Third, services transactions, were consummated through electronic groups such as
yahoogroups and business process outsourcing hubs. Large skills outsourcing sites such
as vworker.com, elance.com and digitalforum allowed employers to find contractual
employees willing to work from home for a project fee. Employers searched the roster of
virtual workers, posted their requirements and job milsetones, and finally made offers.
Virtual workers accepted the tasks, completed the job and received payment- often
electronically or through stored value card. The setup favored both the employee and
employer by granting the worker flexibility to work from home or from transient
locations and the employer to minimize staffing overhead. The setup favors many large
companies such that virtual working environments have steadily grown in the years.43
Whether the transaction involves physical services, intangible products or abstract
services such as web design or encoding, a common thread runs thru these economic
41
See generally Gary Lorenz, Electronic Stored Value Payment Systems, Market
Position, and Regulatory Issues; W. 46 Am. U. L. Rev. 1177 (1996-1997)
42
43
CompuServe, Inc. v. Patterson, 89 F. 3d 1257 - Court of Appeals, 6th Circuit 1996
Paul Jackson, Virtual Working: Social and Organisational Dynamic 133 (2002)
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transactions: the activity is private, unregulated and untaxed. The government enjoys no
means of monitoring such e-business transactions for two reasons:
1)
The transactions do not occur in readily identifiable business locations.
The vendor of products or services can operate out of an internet café,
at home or anywhere he has access to wired or wireless devices.
Location is never fixed and can shift at the whim of the entrepreneur.
2)
Like the Omnibus Election Code’s failure to contemplate ECampaigning , the Local Government Code nor the Implementing
Rules of the E-Commerce Act provides no parameters for the regulation
of web-based commerce of such nature. Shockingly, state of affairs in
the world’s most powerful nation is no different. According to a
government funded study in the United States, 53% of small businesses
are run from home or transient locations, leading to zoning and
regulatory quagmires for the government. In particular, the Internal
Revenue System either fails to tax or it overtaxes such entities!
44
Conflicts can grow to the point that the IRS even disallows deductions
at all for small businesses and penalizes the same for operating at small
scale. 45 Analysts murmer that home based business fall in that vexing
position which may prove to be a hotbed for entrepreneurship (and
sources of government revenue), but is disdained by the extant
regulatory frameworks which ultimately discourage it. 46
44
Joanne Pratt, Home-Based Businesses: The Hidden Economy. Washington, D.C.: U.S.
Small Business Administration, Office of Advocacy, 345 (2000)
45
Mark Crain and Thomas Hopkins, The Impact of Regulatory Costs on Small Firms
(pdf). Washington, D.C.: U.S. Small Business Administration, Office of Advocacy. 499
(2000)
46
Home Based Businesses and Government Regulation available at
http://www.smallbusinessnotes.com/small-business-resources/home-based-business-andgovernment-regulation.html (last accessed Mar 14, 2011)
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The Philippine E-business Economy Expands Exponentially
Paypal Storms The Philippines
Stated earlier in this paper, the 2009 Global Digital Economy report estimated the
value of Asian e-commerce transactions to breach OneTrillion US Dollars and
specifically cited the Philippines and India driving the growth of micropayments
and micro-credits. 47 Micropayments refer only to discrete transactions on a B2C scale,
whereby businesses sell to consumers and vice versa.
Paypal Inc, the world’s largest stored value service provider recognized the
lucrative Philippine e-commerce market and aggressively opened Paypal Philippines
early 2006. The national entry of Paypal signals the depth and bread of online
transactions occurring amongst Filipino nationals and the global community. As of this
paper’s publication, only twenty nations are allowed to transact merchant accounts
through Paypal. The payment giant indubitably seeks first mover advantage in the local ecommerce market which continues to grow by leaps and bounds. As of today, Paypal
partners with over ten local banks, allowing the inbound remittances for purchases made
to Filipino merchants
Philippine Regulatory Framework Continues To Float in Limbo
Electronically facilitated transactions for value continue to accelerate the flow of
currency. The velocity of monitored transfers amongst established multinationals could,
if unchecked, be eclipsed by the informal electronic transactions engaged in amongst
participants of the informal economy. Already, it is widely known that the underground
economy takes more than 80% of the nation’s total output. The situation can grow
worse.
47
Asia-Pacific B2C E-Commerce: China, Japan and South Korea available at
http://www.emarketer.com (last accessed Aug 10, 11:45pm)
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The challenge is indeed a difficult one. Esteemed corporate lawyer Dean Lily
Gruba of the Ateneo College of Law opined that the monitoring of electronic transactions
involving underground micropayments poses a challenge to government. Unless systems
are in place that identify where the transaction is originated and consummated, there will
be no means of regulating the burgeoning underground economy. Dean Gruba suggests
that such a system must not only be in place, it must be made available to government.
Her suggestion could crack open the veil on hidden transactions- but only if regulators lift
parameters of secrecy built inherently into the e-business arena. It’s a tough call- one
prone to abuse and open to rabid dissent. Ultimately, Dean Gruba sagely proposes that
a law which regulates the underground e-business community, rather than directly
generating revenue from it may prove more feasible and practicable.48
The Philadelphia Stop Gap Solution
In the United States, legislators in Philadelphia recently attacked the problem of
internet taxation and regulation by passing into law a piece of legislation that takes square
aim at bloggers. The novel law modified the Philadelphia Tax Code, bringing the
antiquated codification of statutes into the 20th century. In sum, the 2010 Act mandates a
“Business Privilege Tax” on all who blog within the borders of Philadelphia. The tax is
small, amounting to Three Hundred Dollars ($300) yearly- but it is largely viewed as
disproportionate to the earnings of low earning writers or those who blog for charity. 49 A
massive cry of outrage signaled dissent to the levy, but so far the government remains
steadfast. Legislators viewed the move as necessary for the twin purposes of raising
additional revenue from a growing segment of society and keying a watchful eye on the
48
Dean Lily Gruba of the Ateneo College of Law, expert in Local Government Law and
Taxation believes laws for the monitoring and regulation of the underground economy
may prove more beneficial than outright taxation schemes
49
Pay Up or Shut Up: Bloggers Charged $300 for Their Thoughts available at
http://www.nbcphiladelphia.com/news/local/Pay-Up-or-Shut-Up-Bloggers-Charged-300for-Their-Thoughts-101302694.html (last accessed Jan 9, 2011).
25
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market. Will the law be repealed? It is highly doubtful. As more individuals take their
profession to the internet, we can expect more Orwellian regulation over the trade.
Locally, citizens continue to mine the web for sources of livelihood. Blogging as
a business trade is but a minuscule slice from the pie of potential revenue makers. The
Philadelphia Statute, if passed in the Philippines, would hardly span the breadth of the
underground e-business economy. Easily, more money can be generated from the sales of
tangible products, intangible goods and services such as encoding, design and
programming. Blogging, while favored amongst many self-employed Filipino
individuals, pales in comparison to the myriad economic activities partaken by the
populace since 2002.
Local Underground Economy A Boon To The Self-Employed
The trend expands unabated as documented by pinoymoneytalk.com,
sulit.com.ph and pinoyexchange.com. On GMA 7, economist Bernardo Villegas paints a
rosy picture for smalltime online businesses. He asserts that the growth of e-business
startups will continue due to the convenience enjoyed by both buyers and sellers. Who
can resist the allure of the circumstances? The benefits abound. Twenty hour access to a
global market, powered by a low maintenance digital storefront front and unhampered by
high operating costs rapidly levels the playing field for first time entrepreneurs. It is no
big wonder why many give up regular jobs for the power of online businesses. 50
The Broadband Networks Struggle to Cope
PLDT fully grasps the revenue potential of the internet trend. On March 1, 2011,
CEO Manny Pangilinan announced that the telecommunications gargantuan plans to
invest Sixty Seven Billion Dollars ($67B) in the next two years to augment and expand
the local broadband facilities. The investment is justified. The CEO pointed out how the
50
Top Online Businesses for 2011 available at
http://www.gmanews.tv/story/209506/hot-businesses-for-2011 (last access Feb 4, 2011).
26
Joseph R. Plazo
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2009 subscriber base of Forty Two Million jumped to Forty Five Million Six Hundred in
2009. The company’s SMS services revenue dropped by 12 percent, however, this was
offset by the increase of 16 percent in the firm’s broadband income. There is gold in
broadband and mobile internet. The populace is going online and taking its social and
business lives with them.51 Corporate giants perceive a windfall from providing the
backbone to the burgeoning economy.
Step back and look at the big picture. Staggering sums of money continues to
change hands online. The underground economy grows. And the government acts blind
to this large pink elephant sitting in the room. There is no regulation. There is scant
taxation. Everyone knows about it. And yet, the government fails to rectify the situation.
Something must be done.
Infant Steps to Address The Underground Economy.



The Baranggay Microbusiness Act came into existence with the twin
purpose of nurturing entrepreneurship and encouraging registration in
exchange from freedom from income tax.
Unfortunately the Act is hobbled by numerous stipulations:
o The Act covers only baranggay-based businesses employing local
skill and local resources.
o The Act is primarily concerned with manufacturing and
production.
o The Act excludes the practice of professions and those that do not
use local resources- effectively failing to cover internet businesses
Legal analysts say that the law is essentially dead either because few
choose to avail of it due to its limited scope, or they simply don’t qualify.
Self-employed individuals offering programming services, for instance, do
not qualify.
The Underground E-Business Economy Excluded from the MicroBusiness
Act
51
PLDT to Invest $67B in Broadband Facilities available at
http://www.gmanews.tv/story/214232/pldt-to-invest-p67b-in-broadband-facilities (last
accessed Mar 5, 2011)
27
Joseph R. Plazo


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Filipino online entrepreneurs and transients most likely find themselves
excluded from the coverage of the Microbusiness Act. There is remains no
motivation to register their financial transactions nor to pay taxes.
Result: No regulation nor taxation of the local underground internet
economy
Analysis
The Tax Haven Analogue
 World wide, there exists what are known as tax havens and shelters.
o The state of Delaware, USA, for instance, encourages both locals
and foreigners to register LLCs and Corporations in their territory.
Such LLCs are not subject to graduated income tax provided they
do not sell to Delaware residents. The benefit? They pay flat fees
per year in exchange for a registered business entity.
o Other jurisdictions have similar setups, such as the British Isle of
Seychilles, Mauritus, Belize, Panama, Dominica, British Virgin
Islands and Anguillas.
o While these respective governments do not take the lion’s share of
revenues by graduated taxes, they earn fixed yearly revenue per
company registration seeking to establish a Legal Entity.
 The Philippines continues to assert a mandatory progressive income tax
scheme that is easily evaded. As stated, Government cannot tax what it
cannot see.
 A more rational approach to tackling the problem of the underground
internet economy is an evolution of the Baranggay Microbusiness Act
through a merger with the principles driving the tax haven systems
employed in tax shelters.
Conclusions and Recommendations
Chapter XIII: New Legislation Required.
 Government must encourage two things: registration and reportorial for
the primary purposes of REGuLATION
 The best way is to provide incentives that melds the benefits of both the
Baranggay Microbusiness Acts and the assorted Tax Haven Laws of
international jurisdictions.
 Therefore, the paper recommends A New Law that Establishes a
Business Privilege Tax on those engaged in the underground e-business
endeavor.
o First, government must encourage registration of ONLINE
ENTREPRENEURS to those with gross online sales of PhP
3Million and below. The requirement for fix operating bases or
28
Joseph R. Plazo


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locations must be waived to accommodate the existence of
transient operators.
o Second, it must provide exemption from graduated income
taxes/standard business taxes and instead impose a flat yearly tax
of P1,000. The fee will be known as a flat franchise tax/ business
privilege tax.
o Third, it will open the registrant to various facilities of loans,
trainings and technology transfer. According to Dean Lily Gruba,
credit financing schemes purporting easy terms will create an
environment which encourages business development.
o Finally, it will require a monthly, quarterly and yearly report on all
sales and services consummated online. Such report will not result
in taxation but serves for record keeping purposes.
The government gains many ways from the new legislation
o First, the underground internet economy finally becomes visible.
o Second, the government keeps track of actual business
transactions.
o Third, it earns flat fees per registration. Similar to specific taxes
pegged per item, the government stands to generate income, rather
than nothing at all.
o Fourth, it encourages a thriving entrepreneurial community.
Final Words and Conclusions/
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Joseph R. Plazo
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