Are you ready for Online Shopping to be taxed?

There’s been a lot of news lately about the announcement of the Bureau of Internal Revenue (BIR) to go after online sellers. This is because a lot of the ones doing purely online retail may not be applying the standard duties on sales like VAT.

Commissioner Henares has been stressing that they are looking for ways to be able to monitor and collect taxes from online retailers. For one, the usual government bureaucracy of putting up a brick-and-mortar business can be easily bypassed when you do it purely online (you can skip the building permit, mayor’s permit, etc.).

Let’s be clear first that whether it’s offline or online, generating revenue/income from selling products or services is taxable. There’s nothing new that will be introduced. It’s more like enforcing what’s already there.

The closest analogy that I can think of is jaywalking. Anybody who jaywalks can be penalized; it’s already imposed a long time ago. However, there are streets that are not monitored by MMDA so when people crosses that street, they don’t get penalized. Now, the MMDA is saying they will start monitoring those streets that people used to jaywalk all the time because nobody was looking.

Anyway, to give you a better perspective of the difference between brick-and-mortar retailing (those stores in the mall) and online selling, let’s look at an example.

Take for example the Galaxy S3. My sources tell me that the distributor cost of the unit is around Php16,000USD 273INR 23,114EUR 260CNY 1,986 only. If the suggested retail price is Php32,000USD 545INR 46,227EUR 519CNY 3,971, you subtract the 12% VAT and you are left with Php28,571USD 487INR 41,274EUR 464CNY 3,546 (while the Php3,429USD 58INR 4,954EUR 56CNY 426 is remitted to BIR at the end of the month).

Here’s what we think is the estimate computation:

Suggested Retail Price: Php32,990USD 562INR 47,657EUR 535CNY 4,094

Less:
VAT — Php3,535USD 60INR 5,107EUR 57CNY 439
Unit Cost — Php16,000USD 273INR 23,114EUR 260CNY 1,986

Gross Revenue: Php13,455USD 229INR 19,437EUR 218CNY 1,670

Less:
Operating Expenses (@ 30%): Php4,037USD 69INR 5,832EUR 66CNY 501

Income (before Taxes): Php9,418USD 160INR 13,605EUR 153CNY 1,169

Business Tax (30% of Income): Php2,825USD 48INR 4,081EUR 46CNY 351

Net Income: Php6,593USD 112INR 9,524EUR 107CNY 818

The amount of Php6,593USD 112INR 9,524EUR 107CNY 818 is the estimated income per unit sold if this was a regular retail store in the mall.

When we look at the same for an online store, it should look the same. The biggest difference would be the operating expenses (OPEX) which might be lower than our estimated 30%.

However, if all else is the same but we remove the tax incidence, we are looking at Php6,360USD 108INR 9,188EUR 103CNY 789 in savings. If all of these savings are passed on to the customer, then we are looking at an online price of Php26,630USD 454INR 38,470EUR 432CNY 3,305.

This is where the mall price and the online price differ. This is the single biggest reason why mall retailers cannot compete with the prices of online retailers.

What if the BIR was so strict and it runs after the online sellers and ask them to pay taxes? The most logical step is for the sellers to tuck those taxes into the price of the unit.

That would mean that our computation above would revert back to the highest mall price. If the online sellers want to be more competitive, they might lower their retail price a bit. They would normally get this from the savings they get from doing the selling purely online (that’s less rent, bills, etc). So instead of our 30% estimated opex, it could be just 15% (Php2,018USD 34INR 2,915EUR 33CNY 250).

They could then pass on that savings to the customer for a little lower retail price.

Then again, the online sellers would look at this situation differently. They would stick to their usual pricing, keep the little margins that they get from selling way below SRP, and pray hope that the BIR would not go after them for not declaring any sales.

Otherwise, if they abide by the norm and pay the respective dues (and at the same time stick to their competitive pricing), I don’t think there would be any income left after paying VAT and business tax. In some cases, I would even think they’d lose money altogether. This is where a lot of the resentment by online sellers come from.

Worse comes worst, the online sellers to cave in and start selling their products at almost the same price as the ones in the malls.