Fintech: driving digital transformation in financial services

(Second of three parts)

Over the past five years, the Philippines has been gaining momentum in the financial technology (fintech) space, growing ever stronger and rapidly attracting the attention of the global fintech community. The Global Fintech Index 2020, the ranking of fintech ecosystems created by Findexable, has grouped the Philippines with a few others as countries to watch as it is one of the fastest growing fintech destinations.

In the first part of this article, we discussed the key themes that are expected to dominate the headlines in the fintech market in Asia and the Philippines. In the second part of this series, we examine the tax issues in a market that is experiencing phenomenal growth.

The drastic change in the landscape of the financial services industry reflects the stunning growth of the Philippines as a fintech destination. In 2017, the Philippines had only 115 fintechs, which is tiny compared to Singapore, which had the highest concentration (490) out of ASEAN’s 1,268 fintechs, and Indonesia (262). However, the Philippine total nearly doubled to 212 by the end of 2020. The growth of the Philippine fintech industry has slowed since, but a study by the Philippine Institute for Development Studies notes that investments have jumped by 762.5% from 2016 to 2018.

In its ranking, Findexable also found that the Philippines excelled in fintech categories such as payments, enabling processes and technologies, and banking and lending. The meteoric growth in numbers posted by the largest mobile e-wallet service supports this observation, as it surpassed its initial target of 3 trillion pesos in gross transaction value for 2021, three times the record set in 2020.

Much of the fintech market growth stems in part from a supportive regulatory environment. Financial regulators in the Philippines have been just as aggressive as their peers in the region in promoting fintech innovation, even as they strive not to lose sight of their responsibility to foster financial stability. The Philippines is among the few economies in Southeast Asia where regulators have issued licenses for digital banking services, an area that is expected to see significant development that will change the financial landscape in the coming years.

There can only be leaps and bounds for the fintech industry in the years to come, as the market approaches a point where very few workers will have experienced life before the internet. Banks have taken a good look at the digital space due to the limitations imposed by the pandemic, and this can only lead to more confident steps in integrating fintech products into their offerings.

TEAM UP ON REGULATION AND TAXATION
In anticipation of a further increase in fintech activity, regulators have begun setting standards for the industry. All eyes are on the tax agency for a show that will provide guidance on the industry’s tax regime.

In late 2021, the Bureau of Internal Revenue (BIR) and the Securities and Exchange Commission (SEC) said they were working together to ensure fintech companies are properly regulated and taxed even as the government encourages their growth and expansion. continuous innovation. The Department of Finance has asked the two agencies to closely monitor fintech companies and find out what new digital business models they have adopted to determine how they should be regulated and taxed.

Given the dramatic changes that fintech has brought to the financial services landscape, market participants have sought clear guidelines or revenue regulations that explicitly apply to them. In the absence of such rules, fintech companies may be advised to assess and analyze their transactions and apply basic tax principles and procedures to comply with tax obligations.

The tax agency said it will continue to impose the current Tax Code rules on compliance and taxation based on the actual activities of fintech companies, which are similar to those of ordinary companies or financial institutions. . Along the same lines, a previous article in this column titled “Taxation of fintech companies in the Philippines” noted that fintech companies are subject to a regular income tax based on taxable net income at the rate of 25% from from July 1, 2020. The tax rate will be lowered to 20% for fintech companies whose net taxable income does not exceed 5 million pesos and whose total assets do not exceed 100 million pesos, excluding land on which the offices, facilities and equipment of the particular business entity are located during the tax year for which the tax is imposed. But given the infancy of the industry, instead of this regular tax rate, a minimum corporate income tax (MCIT) of 2% may be imposed on a new fintech company from the fourth year of its existence. taxation immediately following the year in which it began its activities. operations. This MCIT rate will be 1% from July 1, 2020 to June 30, 2023. Withholding taxes on this income may also apply.

The ongoing BIR and SEC joint initiative aims to broaden the tax base for fintech-related businesses by ensuring that both agencies have sufficient regulatory and collection capabilities to deal with these digital businesses. The Finance Department said the BIR will continue to gather information from other regulators on identifying, resolving and reducing gaps resulting from the development and proliferation of fintech entities not clearly or explicitly covered by existing regulations. In 2021, the BIR planned to have a team that would assess the tax obligations of fintechs based on the categories identified by the SEC and those regulated by the Bangko Sentral ng Pilipinas (BSP).

VAT ON DIGITAL TRANSACTIONS
Lawmakers are also considering an internal bill that, when enacted, would subject value created in the digital economy to withholding tax/income tax and value added tax (VAT). House Bill 7425 (formerly HB 6765) would impose a 12% VAT on the digital sale of services such as online advertising, subscription services and the supply of other electronic and online services that can be supplied via the Internet, such as such as mobile applications, online services, marketplaces, online software licenses and webcasts, among others.

A key provision of the bill also seeks to add a new section to the 1997 National Internal Revenue Code that would require foreign digital service providers to collect and remit VAT for all transactions made through their platforms.

To address concerns the measure could unduly burden small businesses and self-employed people who rely on digital channels to earn a living, the BSP recently proposed VAT exemptions for low-value digital transactions and for service charges charged by payment service providers.

DIGITAL SERVICES TAX
In light of the infancy of the fintech services industry, it has become imperative for Philippine regulators to also find out what their peers in other countries have been doing for tax purposes. The Finance department is monitoring developments in countries where digital service taxes have been imposed on online platforms.

In mid-2020, the department focused its efforts on collecting VAT on local and cross-border digital transactions, similar to initiatives by ASEAN neighbors. He, however, said he plans to review and propose tax reforms to levy income tax on cross-border digital transactions after an international consensus is reached on taxing the digital economy. Once enacted, this digital services tax will come on top of the 12% VAT on online transactions.

As we eagerly await government guidance on taxation and regulation of fintech companies, the fintech market continues to grow more complex as adoption deepens and its benefits broaden. to have an additional impact on consumers’ lives.

It is imperative for fintech providers, especially those handling transactions, to keep abreast of tax regulations and remain compliant, as to do otherwise and relegate tax considerations after the fact can be detrimental to their customers, partners and even to their own results.

Government regulators want regulation that does not hinder the growth of this young market that has the potential to propel the digital transformation of financial services. However, they are also concerned about appearing to provide support that could be interpreted as giving fintechs an unfair competitive advantage. Active engagement with government on the part of market participants will be critical as the fintech market policy regime takes shape.

This article is provided for informational purposes only and does not replace professional advice when the facts and circumstances warrant it. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Allenierey Allan V. Exclamador is a tax partner of SGV & Co.

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